Poor little fella barely made it past the "Gross Revenue" line
If you’re already enough of a geek that you’re reading a personal finance blog despite being just a few keystrokes away from participating in The Golden Age Of Internet Porn, we invite you to take the next step.
Before you invest in any publicly traded stock, you need to understand how to read financial statements. This applies even if you let your company’s HR department handle your 401(k) and never bother to look at what mutual fund(s) it owns a piece of. You need to start looking. Stock prices move in both directions, in case you weren’t aware.
One more time: if you have a company-directed 401(k) then it probably owns part of a mutual fund, which is a basket of any number of stocks – usually around 80-100. Do you have time to measure the positive and negative indicators of 80 stocks? Probably not. That’s what fund managers and investment analysts are for.
If you rely on them, you’re not taking ownership of your finances. You’re passing the buck, almost literally. How many 401(k)s counted General Motors as a component a couple of years ago? You know, the most disastrously managed company in the history of American commerce*? When GM stock sank and ultimately got delisted – to say nothing of Fannie Mae, Freddie Mac, and other government wards that our elected officials insist on keeping on life support – how many of the people who indirectly held it via their mutual funds cared or noticed?
Would you like to know how to do this? If we taught you how to fish, would you ever worry again about going hungry? If we taught you how to weigh yourself, would that information come in handy for your next doctor’s appointment or Army special ops recruiting signup?
Understanding financial statements is more intricate than stepping on a scale, but not by much.
We needed a guinea pig, so we went down the list of America’s most profitable companies, stopping when we found one whose public image is pristine enough that people don’t routinely bitch about the company. That eliminated ExxonMobil, Microsoft, Wal-Mart, Pfizer, Merck, Philip Morris etc. We ended up at company #22, Corning. Besides, the Cincinnati-based glass and ceramics maker is only America’s 414th largest company by revenue, meaning it must have healthy profit margins.
We then give Corning the EDGAR treatment. EDGAR is the Securities and Exchange Commission’s Electronic Data-Gathering, Analysis, and Retrieval system: it’s where publicly traded companies are required by law to post their financials, and it’s at sec.gov/edgar.shtml.
You bored yet? Probably. Fix yourself a sandwich, turn on some music, meet us back here in 5. Here’s a Magic Eye picture to keep you occupied:
The money page on EDGAR is this one. Enter the relevant name or ticker symbol. Corning’s is GLW, which the company’s website says stands for “Corning Glass Works”. Apparently Jacques Demers is their vice president of investor relations.
It’ll ask for a “Filing Type”. The one you want is called the 10-K, which is essentially a company’s annual report without all the PR bullcrap.
It’s an htm file, should be easy to access. But don’t read it, it’s as interesting as watching glaciers move. Just search for the following phrases:
Consolidated Statements of Income (plural)
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
There are other financial statements, but these are easily the most important. We’ll bang them out one at a time, starting with the income statement (a/k/a the “profit and loss statement”).
Look at a company’s financial statements, and you can learn more than you imagined. You’ll discover how much debt the company is carrying, and if it’s leveraging itself to the point where it’ll be tough to pay back all the people it’s borrowing from. You’ll be able to determine whether the company is consistently increasing profits year after year, or if it’s standing on a plateau. Or a cliff. You’ll distinguish legitimate assets that can help the company grow from overvalued ones that make little difference to the bottom line.
Sifting through this is a little dreary at first, but so what? You’re an adult: most of what you’re now doing is boring. Kids get to enjoy life: they don’t have to concern themselves with saving receipts and filing taxes and learning to keep the warranty cards for their household appliances. The trade-off is that kids are stupid and poor.
Perusing a 10-K is as convoluted as you want it to be. We promise to make it painless, or at least reasonably so.
Next up, the three major types of financial statements and how they work.
*GM easily gets the nod over Enron, which never created anything tangible and was never a significant cog in the economy to begin with. GM used to make tanks to flatten Nazis with. Now its primary output is Christmas baskets for union bosses.
