'Real highlights' provide investment information

by Jack Lantis

for the Business Journal

As part of your ongoing stock-investing education, you have several valuable tools at your disposal that cost you nothing and can tell you a lot.

They are annual reports, and they can provide you a wealth of information about stocks you already own or are looking to purchase.

Under Securities and Exchange Commission (SEC) regulations, a publicly held company must distribute financial information to all of its shareholders. You can receive a company's current annual report and those of past years at no charge simply by contacting its investor-relations department. While each annual report will include significant events the company wants you to focus on, you may want to review the following "real highlights" such as:

?Letter to shareholders. This is where the chairman or chief executive officer describes how well (or not so well) the company performed during the past fiscal year, and what steps it plans to take to have a successful coming year.

It also helps to look at annual reports from the last several years and compare the top executive's past letters to the results the company got in the following years. If expectations were discussed but not met, and you can't find a good explanation, there may be a problem with management or the company's operation.

?The financial statements. Included in these sections are the assets, liabilities, revenues, expenses, shareholders' equity and changes in financial position. Review the numbers closely to see if the company's year-over-year pattern is an increase or decrease in profitability, or if the company has experienced constant changes in performance.

As one general gauge to measure a company's investment soundness, you can calculate its "current ratio," which divides the company's current assets by its current liabilities. While the company's industry plays a key role in determining how many assets the company should have, a current ratio of 1-to-1 or better usually indicates a financially stable company.

As an example, let's say XYZ Company has $150 million in current assets and $100 million in current liabilities. Its current ratio would be 1.5 ($150 million/$100 million = 1.5) and could signify a company with financial soundness.

?Company's income statement. This section gives you a chance to see a company's profitability level over the past several years. To make sure the company isn't inflating its earnings, check for entries called extraordinary or nonrecurring gains. In some instances, these could mean the company is selling assets to cover operating losses.

Keep in mind a company is also required by the SEC to disclose its accounting methods and other material information. Along these lines, also scan the accountant's letter. Be sure the auditor did not express any concerns about the company's report.

Don't be too concerned if you can't "crunch" all of the numbers included in a company's annual report. Just remember to look for the basic patterns in the company's financial history, and you'll get a better sense of how worthwhile it would be to invest in that company's stock.

Your investment professional can also help you determine if, and how, that company fits in your investment plan.

(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in Springfield.)

INSET CAPTION:

If expectations were discussed but not

met, and you can't find a good explanation, there may be a

problem with management or the company's operation.[[In-content Ad]]