Bill Roberts-- How to Read Company Financial Statments; A Primer for Journalists

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    How to Read Company

    Financial ReportsNational Press Foundation

    Paul Miller FellowsSeptember 2013

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    Overview

    Understand SEC 10-Ks, 10-Qs, 8-Ks, S4s, 13D

    Decipher CEO pay packages by looking at proxystatements or Form 990s.

    Learn from SEC filings about company strategies,markets, competition risks and legal liabilities.

    Feed ratios, KPIs, analyst comment into coverage;spot and enterprise.

    Awareness of the political economy aroundfinancial reporting.

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    Public vs. Private

    Public companies issue stock toinvestors, traded on public

    exchanges Private companies do not (some

    issue public bonds, or limited stock.)

    Non-Profit Orgs file IRS Form 990, apublic financial statement

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    Balance Sheet

    Assets = Liabilities + Equity

    Equity = Assets - Liabilities

    The T balances

    Maximizing shareholder equity

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    Income Statement

    Revenues Expenses = Income

    Income = Revenue Expenses

    Income = Profit (Loss)

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    Accounting

    GAAP - Generally Accepted Accounting

    Principles

    Private Sector Standard Setting Bodies

    authorized by the SEC

    FASB Financial Accounting Standards Board,

    Norwalk, Conn. (US GAAP)

    IASB International Accounting Standards

    Board, London, UK. (IFRS, 120 countries)

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    Accrual vs. Cash

    Debits and Credits

    Advance recognition of revenue to

    match economic activity Revenue does not equal cash

    Sales on credit

    What are revenue recognitionrules?

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    Cash Flow Statement

    Accrual method means income statement,revenue, sales and expense dont equal cashflow

    Cash flow statement provides a picture ofwhere the real money goes in and out

    Starts with net income and backs out non-

    cash items How does the company use its cash?

    Compare that to managements strategy?

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    Brief History Lesson

    Why this boring dry financial stuff

    matters Understanding the big picture

    The publics legal rights toinformation

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    Legal Framework

    Crash of 1929, Congress holds hearings

    Securities Act of 1933 - creates SEC

    Securities Exchange Act of 1934 -regulates stock markets, protects

    investors

    CFR Title 17 - Stock issuing companiesare required to register with the SEC and

    file periodic public reports

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    1980s S&L Crisis

    1000s of S&Ls and banks fail due to hot

    money real estate lending, ponzi schemes

    Jim Wright, Keating Five

    FIRREA Financial Institutions Reform,

    Recovery and Enforcement Act of 1989,

    banned goodwill from bank capital, triggered

    ware of federal takeovers

    1990s Commercial Bank Credit Crunch

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    Federal Law Requires Fair Disclosure

    SEC issues Reg FD in 2000 to eliminate

    selective disclosure of market moving info

    Requires publicly traded companies to

    disclose material information to all investors

    at the same time

    Company conference calls with financial

    analysts are open; anyone can dial-in.

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    All Lawyered Up

    SEC Rule 10b-5 prohibits material

    misstatements and fraud

    1988 Supreme Court allows shareholder class-

    action lawsuits, fraud on the market theory

    1995 Private Securities Litigation Reform Act

    raises bar for filing shareholder suits

    Stoneridge Investment Partners LLC vs.

    Scientific-Atlanta, 2008 Sup Ct.

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    2000s Accounting Scandals

    Dot.com bust, Enron, Worldcom, et al.

    Big five auditor Arthur Anderson indicted

    Sarbanes-Oxley Act tightens corporategovernance, requires companies to set

    up internal controls

    SOX establishes PCAOB

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    Financial Crisis of 2007-2008

    U.S. Housing bubble bursts, causing value ofmortgage backed securities to plummet.

    Massive losses on assets damaged bank

    capital. Worst Financial Crisis since the GreatDepression. Global financial system nearcollapse amid liquidity crunch.

    Bear Stearns, Lehman Brothers 2010 Dodd-Frank Act mandates study of FV,

    etc.

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    Business Reporting

    Use company financial statements in your

    reporting

    Ask better questions, probe the right subjects,

    establish credibility

    Always read the statements first, press release

    second. Watch the spin.

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    10-Ks and 10-Qs

    Annual Report, 10-K, is audited; QuarterlyReport, 10-Q, is not

    Management Discussion and Analysis

    Litigation

    Certain Transactions

    Related Party Transactions

    Read and Assess Footnotes

    Auditors letter. Clean?

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    Proxy Statement

    SEC Form 14-A, Notice of AnnualMeeting

    How much CEO and senior mgmt arepaid

    Any side deals between managementand the company

    Who the board members are

    Questions shareholders will vote on

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    8-K, Report of Material Event

    Must be filed to inform investors of

    major developments.

    Mergers and acquisitions, major sale ofassets, lawsuits, regulatory penalties

    Generally, by definition this is news;

    sometimes the PR people spin, or staysilent. Look for what investor relations

    people are telling the markets.

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    IPO, or Initial Public Offering

    S-1, or Prospectus

    Companies that go public or sell stock

    to investors through a public offeringmust first file a Registration Statement (S-

    1) with Exhibits to the SEC

    Facebook; Sold at $38, dropped to $20 intwo months Revenue model issue.

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    Who owns the stock?

    Insiders are believed to know more

    about their company than anyone else;

    Form 144, or Form 4 issued wheninsiders buy or sell shares. Is CFO

    dumping shares?

    Form 13-D shows buyers of 5 percent ormore of outstanding shares. Activist

    investors, controlling shareholders.

    Investment funds

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    Ratios, KPIs, and Warren Buffett

    ROE = Return on Equity

    ROA = Return on Investment

    Expensive or cheap? Book Value vs Price, orPrice to Book = Trading at X times book

    value

    Compare to Industry Benchmarks

    Lehman and Repo 105, leverage ratios, off-

    balance sheet vehicles

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    How To Use Wall Street Research

    Listen to the CEO/CFO earnings calls with

    analysts.

    Follow the jargon; are the analysts focused on

    particular ratios or dynamics in the reports?

    Get analyst reports and phone numbers;

    Develop source relationships.

    Institutional investors

    Consolidation vs business unit results

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    Assert Skepticism & Judgment

    Just because info is in a companys SEC report,

    doesnt necessarily mean its true!

    Ask yourself whats real? Wheres the air?? Use a

    spreadsheet

    Annual and Quarterly reports are snapshots;

    economic entity depicted is actually continuous.

    Management disclosures in a competitiveenvironment; strategy vs. economic and industry

    trends, changing business models.

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    How to Read Company Financial

    Reports

    Bill Roberts

    202 329 7157

    [email protected]

    mailto:[email protected]:[email protected]