Why Look at Corporate Financial Reports?

Why should you spend some time learning about corporate financial statements?

Because when you invest for a longer term you are not buying stock, you are buying a company. You should have some comfort in how the company is doing financially. The financial statements are the place to find out the true story. Company press releases naturally present the numbers in the best light possible. You would also if you were writing them. Not that they are hiding anything, but there is a lot of emotional decision making going on with investors and it's best to keep things as calm as possible.

As a potential owner of a company, you'd probably like to know both the good and the bad about how things are going. Trying to decide whether to invest in a company is in many ways similar to trying to decide whether you'd like to try and live your neighbors life by investing in an idea he has. From the outside, you see he has a big fancy house and two sports cars in the driveway. That might make you think that he knows how to make money and that you would benefit by allowing him to manage some of yours for you. But, if you could actually see and understand his finances, you might find he is living on borrowed money, is about to lose his job and has no prospects for a new one. He might have a lot of new ideas about how to get back on track but he may have yet to have actually implemented any of them so he really doesn't know if they will work out. He may have an attractive new wife, but he may have one or more former wives still with claims on his resources. Maybe you don't want to have him manage some of your assets after all. If your neighbor ran his life as a public business and had to produce quarterly financial statements that met certain accounting standards, you'd be able to see all these issues.

Financial statements may, at first glance, look long and involved and intimidating but they follow a basic set of rules and there are things that you can learn to check out easily and at least ask questions about. You don't have to learn the accounting required to produce them. You just need to learn what kind of questions to ask. Since you are trying to educate yourself by asking questions, no question is foolish. By asking it, you will, at a minimum, learn something new that will help to make you a more savvy investor in the future.

Don't assume the people writing the headline articles are asking the important questions for you. Everyone writing an article has an agenda behind the information they are conveying. If you develop some comfort level with looking at the numbers and asking your own questions you will start to be able to see which companies are well run and well managed and which have stock prices are more related to a good "story" than a proven history.

This series will highlight different aspects and things to look for in company financial statements. There will also be ideas for activities your investment club can do to encourage you to open them up and venture into them. You might actually find it's fun. You might be surprised to find that you'll start to look forward to each new "sequel" to the last earnings report.

Incidentally, just like information in any book, the material in some reports is very clearly presented. They are very easy to read and understand. With others, you get much more of a headache trying to decipher what is being said and why. This, in and of itself, might tell you something about a company you are thinking of investing in. If it's too hard for you to understand how their business operates and how they make money, it is probably a good red flag that you might want to look at a different investment.