Financial Accounts

[robertbanking]

Hello you very pleasant and amazing individuals, i do hope you are doing well today and you are happy.

I was kindly wondering please when analysing a 10-K a companies annual account information, i am just trying to formulate a checklist of what things would be classed as a positive and what you would perceive as something negative. What would be some examples you would make a note of that are positive to make an investment decision please and other examples of things you would perceive as negative and against investing please? Further once you get confident reading annual reports, can you skip to areas please you feel would be most relevant rather than reading all the contents? If anyone kindly had any thoughts on this i would be very grateful and thankful, it would mean the world to me.

Hope you have a pleasant day and look after yourself. Thank you very much for any support you can give.

[tjh290633]

I'm not familiar with the 10-K, but the aspect which I tend to look at is the Cash Flow statement. That is often the most informative part of the annual report.

TJH

[Dod101]

I'm not familiar with the 10-K, but the aspect which I tend to look at is the Cash Flow statement. That is often the most informative part of the annual report.

TJH

I do not know what is meant by 10-K either but I do almost no analysis of the numbers. I am much more interested in the 'soft' issues, the culture, how they treat their staff, no jargon in the Report and stuff like that. You can actually pick up a lot from the Annual Report but you also need to read around it. Long term outlook, conservative, do they have any family shareholdings and so on. I also avoid some sectors altogether such as supermarkets, contractors and most housebuilders.

About the only thing from that in the Annual Report would be their borrowings, but reputation if you can get a handle on it is very valuable.

Dod

[pje16]

Also, the Balance Sheet
a snapshot at its date, of the entities assets and liabilities

[SalvorHardin]

I'm not familiar with the 10-K, but the aspect which I tend to look at is the Cash Flow statement. That is often the most informative part of the annual report.

TJH

10-K is American. It is like a British annual report. It's a form which must be submitted in a particular format to the Securities and Exchange Commission.

10-Ks are very boring, very long, often filled with nonsense (e.g. all companies have to report on their mining activities) and it puts the accounts towards the back.

As to the OP's question, for me the key things to check are the debt and looking for the following warning signs (most of these come from Terry Smith's book "Accounting for Growth"):

1) are the earnings are being flattered by the company treating exceptional gains (one offs, usually due to asset sales) as operating profits

2) Is the company claiming that costs are assets and recurring costs are one offs.

3) Is the company trying to push EBITDA (or similar) in place of EPS? Lots of companies produce their own definitions of "profit", many of these belong in the fiction section

4) Look for extraneous nonsense in the report, such as pictures of flashy buildings, fountains, private jets and helicopters (massive warning signs unless these are the company's business).

5) Quick check as to how many of Phil Fisher's 15 points are met by the company (mostly qualitative factors)

https://novelinvestor.com/philip-fishers-15-points/

I'm with Dod in mostly looking for qualitative factors. All too often detailed number crunching can produce results which give a false sense of security.

[dealtn]

I'm with Dod in mostly looking for qualitative factors. All too often detailed number crunching can produce results which give a false sense of security.

To an extent I agree, but an Annual report isn't where I would be looking - and if I were I would be super critical. This is in house produced by the marketing team and demonstrates how good they are at that, which isn't a great correlation with the underlying company in whom I might be considering investing.

Numbers wise its cashflow statement, then balance sheet, then p/l account in that order. The "notes" being at least as important as the actuals.

[dionaeamuscipula]

To an extent I agree, but an Annual report isn't where I would be looking - and if I were I would be super critical. This is in house produced by the marketing team and demonstrates how good they are at that, which isn't a great correlation with the underlying company in whom I might be considering investing.

Maybe its just me, but IME marketing/PR do about 9%, finance 90%, board 1%.

And I would hazard that the number of people who read it the whole way through, excluding auditors, is in low single figures for most small to medium sized companies.

DM

[robertbanking]

Thank you very much for getting back to me, it does mean alot and i am very thankful for all your replies, you have been very helpful.

SalvorHardin i very much appreciate that you look at key things from Terry Smith's book Accounting for Growth. I agree that is very intelligent to check if earnings are being flattered by the company treating exceptional gains as operating profits. Further is the company claiming that costs are assets and recurring costs are one offs. I have also heard that if a company has a high amount of treasury stock this could be a negative as they could reissue using the current share price to cause dilution. Thank you very much for your support with this, do you kindly please have anything else that may be critically important to look at?

dealtn thank you very much for mentioning that you review the cashflow statement, then balance sheet and profit / loss account in that order. Can i kindly please ask what you look for specifically, such as high cash flows etc and do you run any ratios or calculations on this data please? If you kindly had any thoughts on this it would really be appreciated.

I appreciate your support with this, i am learning all the time, so your posts are extremely helpful. I have made a few notes from your kind posts. Wish you a wonderful day and take care.

[Charlottesquare]

Thank you very much for getting back to me, it does mean alot and i am very thankful for all your replies, you have been very helpful.

SalvorHardin i very much appreciate that you look at key things from Terry Smith's book Accounting for Growth. I agree that is very intelligent to check if earnings are being flattered by the company treating exceptional gains as operating profits. Further is the company claiming that costs are assets and recurring costs are one offs. I have also heard that if a company has a high amount of treasury stock this could be a negative as they could reissue using the current share price to cause dilution. Thank you very much for your support with this, do you kindly please have anything else that may be critically important to look at?

dealtn thank you very much for mentioning that you review the cashflow statement, then balance sheet and profit / loss account in that order. Can i kindly please ask what you look for specifically, such as high cash flows etc and do you run any ratios or calculations on this data please? If you kindly had any thoughts on this it would really be appreciated.

I appreciate your support with this, i am learning all the time, so your posts are extremely helpful. I have made a few notes from your kind posts. Wish you a wonderful day and take care.

Compare EPS with CPS, do not just look at just one set of accounts, I would look at maybe 5 years. If there is a distinct gulf where EPS exceeds CPS, ask why? If no reasonable reason be hesitant ,especially if Debtors/WIP/Stock growing. Re ratios look at turnover against say combined WIP/DEBTORS/STOCK (Add them up) If WIP/DEBTORS/STOCK combined is increasing as a percentage of sales you may want to pause, why can they not convert these?

My other pet note is the pensions note, if still got final salary scheme benefits what are the risks, especially if interest rates start shifting quickly, re funding needs?

Of course the other thing is stop reading individual company accounts and embrace lazy investing via ITs, a route I have more embraced the older I have become.

[robertbanking]

Thank you very much for your response Charlottesquare, i really appreciate your response, that is very kind of you and you have shared some amazing insights.

I appreciate you mentioning to compare EPS with CPS and review 5 years of annual accounts. I also very much appreciate you mentioning to look at ratios, looking at turnover against combined WIP/DEBTORS/STOCK. I think the pension topic you mentioned is highly important and something easily overlooked, if there is final scheme salary benefits, if interest rates start shifting can these be funded.

Can i kindly please ask where did you pickup the skills for investing please or was there anything you felt helped you the most advance your skills please? Did you take any courses please? Is there any books you can kindly recommend please? Further do you watch YouTube videos on these topics please? If you kindly had any thoughts on this it would be more appreciated than you may know and mean the world to me.

Hope you achieve massive success in your investing Charlottesquare and as ever i wish you all the very best. Hope you have a lovely day.

[Charlottesquare]

Thank you very much for your response Charlottesquare, i really appreciate your response, that is very kind of you and you have shared some amazing insights.

I appreciate you mentioning to compare EPS with CPS and review 5 years of annual accounts. I also very much appreciate you mentioning to look at ratios, looking at turnover against combined WIP/DEBTORS/STOCK. I think the pension topic you mentioned is highly important and something easily overlooked, if there is final scheme salary benefits, if interest rates start shifting can these be funded.

Can i kindly please ask where did you pickup the skills for investing please or was there anything you felt helped you the most advance your skills please? Did you take any courses please? Is there any books you can kindly recommend please? Further do you watch YouTube videos on these topics please? If you kindly had any thoughts on this it would be more appreciated than you may know and mean the world to me.

Hope you achieve massive success in your investing Charlottesquare and as ever i wish you all the very best. Hope you have a lovely day.

I have worked most of my life since university as an accountant so reading company accounts came with the job (Though I never actually prepared accounts for large quoted companies I did work on some audits of subsidiaries of some listed entities) My favourite business finance book was/is Samuel & Wilkes (Now Samuel, Wilkes & Bradshaw). I think age has rounded my views on investing and made me more realise that exact precision of financial analysis is not as important as sniffing the air. Re investing ,cash is key (a business should never run out), a dependence on banks etc is a habit best avoided, diversity messages re eggs and baskets are sound over generations and never invest in things you cannot understand is a worthwhile maxim as if you do you are not really investing you are more gambling.

[OhNoNotimAgain]

Hello you very pleasant and amazing individuals, i do hope you are doing well today and you are happy.

I was kindly wondering please when analysing a 10-K a companies annual account information, i am just trying to formulate a checklist of what things would be classed as a positive and what you would perceive as something negative. What would be some examples you would make a note of that are positive to make an investment decision please and other examples of things you would perceive as negative and against investing please? Further once you get confident reading annual reports, can you skip to areas please you feel would be most relevant rather than reading all the contents? If anyone kindly had any thoughts on this i would be very grateful and thankful, it would mean the world to me.

Hope you have a pleasant day and look after yourself. Thank you very much for any support you can give.

This may come across as unduly cynical but is based on my 40 years of experience in finance.

You need to remember that the annual report, 10K or whatever, is written by liars who have a strong financial interest in only giving you good news.

The soft stuff is almost entirely baloney and should be ignored.

Do not rely on audited accountants. Auditors are greedy ambitious men (usually) who are appointed by greedy ambitious men (usually)who will, generally, approve anything they are asked too.

There is only one number you can trust in the whole report and that is the dividend payment because you get external verification when it lands in your bank account.

[pje16]

This may come across as unduly cynical but is based on my 40 years of experience in finance.

You need to remember that the annual report, 10K or whatever, is written by liars who have a strong financial interest in only giving you good news.

The soft stuff is almost entirely baloney and should be ignored.

Do not rely on audited accountants. Auditors are greedy ambitious men (usually) who are appointed by greedy ambitious men (usually)who will, generally, approve anything they are asked too.

There is only one number you can trust in the whole report and that is the dividend payment because you get external verification when it lands in your bank account.

I have worked for over 40 year in a Chartered firm of Accountants in the city, not sure which cowboys you have come across, but yours is not my experience

[OhNoNotimAgain]

This may come across as unduly cynical but is based on my 40 years of experience in finance.

You need to remember that the annual report, 10K or whatever, is written by liars who have a strong financial interest in only giving you good news.

The soft stuff is almost entirely baloney and should be ignored.

Do not rely on audited accountants. Auditors are greedy ambitious men (usually) who are appointed by greedy ambitious men (usually)who will, generally, approve anything they are asked too.

There is only one number you can trust in the whole report and that is the dividend payment because you get external verification when it lands in your bank account.

I have worked for over 40 year in a Chartered firm of Accountants in the city, not sure which cowboys you have come across, but yours is not my experience

As Christine Keeler said:

You would say that wouldn't you.

[Dod101]

Hello you very pleasant and amazing individuals, i do hope you are doing well today and you are happy.

I was kindly wondering please when analysing a 10-K a companies annual account information, i am just trying to formulate a checklist of what things would be classed as a positive and what you would perceive as something negative. What would be some examples you would make a note of that are positive to make an investment decision please and other examples of things you would perceive as negative and against investing please? Further once you get confident reading annual reports, can you skip to areas please you feel would be most relevant rather than reading all the contents? If anyone kindly had any thoughts on this i would be very grateful and thankful, it would mean the world to me.

Hope you have a pleasant day and look after yourself. Thank you very much for any support you can give.

This may come across as unduly cynical but is based on my 40 years of experience in finance.

You need to remember that the annual report, 10K or whatever, is written by liars who have a strong financial interest in only giving you good news.

The soft stuff is almost entirely baloney and should be ignored.

Do not rely on audited accountants. Auditors are greedy ambitious men (usually) who are appointed by greedy ambitious men (usually)who will, generally, approve anything they are asked too.

There is only one number you can trust in the whole report and that is the dividend payment because you get external verification when it lands in your bank account.

I have worked on the other side from Charlottesquare, running a few subsidiaries of a quoted company (in Hong Kong) As such I often had to discuss matters with the auditors, not that they often found anything/much wrong with our accounts but they never struck me as particularly greedy ambitious men, and actually whilst we can find such people in any walk of life I do not think the majority of either company directors or auditors fall into that category.

I can assure ONNHA that soft factors do matter a great deal, sniffing the air as I think Charlottesquare said. I would agree that accounts can be manipulated and there is a often a lot of stuff in Annual Reports that is just irrelevant if not worse but that is what the 'sniffing' is for, to recognise that.

Dod

[JohnW]

As Christine Keeler said:

You would say that wouldn't you.

MRD. https://en.wikipedia.org/wiki/Mandy_Rice-Davies

[pje16]

I have worked for over 40 year in a Chartered firm of Accountants in the city, not sure which cowboys you have come across, but yours is not my experience

As Christine Keeler said:

You would say that wouldn't you.

please yourself
I'm past caring

[XFool]

please yourself
I'm past caring

Great! How's it compounding?

viewtopic.php?p=558322#p558322

[Dod101]

As Christine Keeler said:

You would say that wouldn't you.

please yourself
I'm past caring

I wondered who he was!

Dod

[OhNoNotimAgain]

As usual the thread has veered completely off-topic.
The point I wanted to make was that if you were looking for divine inspiration from detailed examination of published accounts you won't find it for two reasons, apart from the issue of veracity.

One is that there is an army of people doing the same thing and the chances of an information gap being discovered by you are vanishingly small.

Secondly, accounts being published now refer to 2022. At the beginning of that year the world was a very different place, world in lockdown and no war in Europe. Investing is about what happens next, not what happened, 16 months ago.

No one knows what will happen next so invest accordingly.