Trade The Journey

Trade The Journey

Reading the Annual Report!

I hope everyone is safe, at home and in good spirits.

I’m sure everyone would attest this is an experience like no other. Staying positive in times like these can make the difference between emerging from this pandemic a step ahead or behind.

I’m trying my best to stay positive, which at times is hard to do. The only question I have is, how will we emerge from this as a nation? By the looks of things, more divided than ever. People have chosen their sides and seem unwilling to budge.

Some are eager to return to work, willing to sacrifice themselves for the greater prosperity of all.

Some want to remain at home until a vaccine is discovered, or vast testing is completed to ensure safety and equality for all.

And most disregarding party lines, think that the health of the country is more important than all else.

The politicians no longer guided by the greater good are now loyal only to their followers and political base.

However, I find it particularly disheartening to see the betrayal on one side, leading their followers to a destiny that no longer exists. I’m not here to talk politics, but unfortunately, I must because politics is now part of the economic equation. The separation is blurred between the banks, corporations, and government.


With that, I digress.

To keep myself away from binging on Netflix series like Ozark, Narcos, and Bojack Horseman, I decided to strengthen my foundation in accounting. Accounting is the language of business, the engine under the hood of a business.

The trickery is in the numbers, hidden not by obscurity but by a lack of understanding. My goal was to finish a company annual report per day. By the end of the stay-at-home order, I’d have read close to thirty annual reports.

Quickly, I saw that the goal of reading an annual report per day was quite silly. Reading an annual report requires note-taking, researching, verifying, and analyzing. So far, I’ve read several annual reports in the retail sector, with one exception being a biotechnology company.

I have experience in retail and inventory management, so I figured the retail sector might be the best place to start.

The first thing I do is download the 10k, which is the company’s annual report. Since I’m a novice, I start from the beginning of the report skipping the colorful updates given by the company.

Usually, a company touts its accomplishments for the year at the beginning with colorful pictures and graphs. It’s nice to read, but the real value lies in the companies explanation of its s strategies, risk factors, and managements’ discussion/analysis of its financial statements.

In the management discussion section, the company goes through the lines of the financial statement and gives a detailed explanation of the account. The line on each statement is an account, a way to separate the money. Money needed to pay off the suppliers is designated for the accounts payable rather than kept alongside other monies in one large account.

Along with the account explanations, the footnotes for the account lines are listed below the financial statement.

The footnotes and account explanations should give you an understanding of management’s skill in increasing value for the shareholders. There are plenty of sites that list the ratio calculations for the companies financial statements. Ratio analysis is another subject of its own, it basically involves comparing accounts.  Return on Equity and Return on Assets give you a mathematical understanding of the management of a company.

 

Are they efficient and effective? The ROE and ROA will tell you.

It took me a while to understand how to decipher the numbers, and I am still learning how to apply the information contained within the numbers. Within a price are many costs and estimations—the same with a stock.

A stock is a price that is influenced by many variables and participants. The price is information. Whether the market appreciates the information is another story.

All of this has to be incorporated into your thinking when analyzing a company for investment.

For example, By understanding the companies debt position, you can assess the companies chance of growth or decline. Debt influences a companies ability to remain agile, capitalize on new opportunities, and stay solvent during times of peril.

The cash a company maintains lets you know how well the managers are managing a company. Cash is king. Cash allows you to reap the benefits of an investment without becoming indebted. The investment could be in research, dividends for shareholders, debt reduction, etc.

I’m sure your beginning to appreciate how important a strong foundation in accounting is. With each annual report, I’m becoming better at understanding what’s important and what isn’t.

Reading the annual report is akin to studying history. What’s in the annual report already happened. Events like the Coronavirus can occur, destroying the comparability between years.

“When the tide goes outs, you can tell who was swimming naked.” – Warren Buffet.

Analyzing an annual report is hard work. Its harder than most people imagine. They say Warren Buffett has read hundreds of company reports over the year.

I hope to reach a hundred by year-end.


This past week in review:

I can’t say that each week’s expenses vary significantly. It’s pretty much more of the same. Last week I began offering research analysis for companies at a reasonable price.

This past week, I’d like to give myself a “C” for maintenance.

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