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Wired West: Volume 8, no. 1

Calgary Events

Digging for Dirt or Mining for Gold: What you can Learn from a Company’s Annual Report

By Marjorie Munroe.

SLA Calgary was pleased to welcome Bruce Hanson, Business Development Manager from TD Waterhouse, for our first luncheon of the year on September 23 at the Palliser Hotel. 34 people came out to hear Bruce discuss the fundamental analysis of an annual report.

I walked away from this luncheon with a couple of key messages:

• Annual reports are OLD NEWS, a snapshot in a moment in time. The brokerage business works on anticipation and expectation: looking at company figures over a long period of time.
• It is critical to compare a company to its peers. How do their expenses compare? How does the debt equity ratio compare? You need some industry knowledge.
• Has the company accurately gauged its own risks and exposure? The outlook from the annual report is bound to have a positive spin. Is it realistic?

Bruce discussed a number of figures from the annual report that are used by analysts to determine trends for a particular company, including:

Balance Sheet – The balance sheet is quite simply the figures that determine the shareholder’s equity, or book value if liquidated. Analysts look to discover companies who have undervalued their assets. Do they have a realistic grasp of their assets and liabilities? For example, can they sell their properties at market value under pressure? Can they receive their accounts receivables?

Income Statement – Analysts will look at the trend of earnings. What is the area of risk? Are expenses over-inflated relative to peers? Look for consistency.

Earnings per Share – Are the net earnings per share growing?

Price Earnings Ration (PE ratio) – For many analysts the current stock price (less preferred dividends) over earnings per share is a key figure. Examined over time this ratio will reflect the psychology of a marketplace. In 1999, technology stocks had a huge PE ratio because investor anticipation said earnings would value quickly. This did not happen and we had the tech stock crash.

Return on Equity (ROE) – For other analysts the return on equity is a key figure because it can reveal how good a company is at turning assets into profit. This ratio is net earnings (less preferred dividends) over common equity.

LTD to Capital – This is the debt equity ratio, arrived at by examining both long-term and short-term debt over shareholder’s equity. Debt of 50% of equity is a good benchmark, however it varies widely by industry, so it is key to compare this figure among peer companies.

Cash Flow Statement – The cash flow statement shows money moving through a company related to a per share basis. Some analysts will skip over the cash flow statement but oil companies, for example, are valued more on a cash per share basis than an earnings per share basis.

Bruce pointed us to a couple of key websites and sources for finding information:

• http://www.standardandpoors.com
  Standard & Poors Stock Reports contain the same financial data as an annual report but provide a 5-year or longer history.
• http://www.reuters.com
  Reuters Pro Vestor Plus Company Report is an excellent source for comparative peer data.
• http://www.argusresearch.com
  Argus Research Company reports provide an investment thesis with a good look at the key issues. Vickers Stock Research provides an insider trading report. Perhaps a period with many insider sells is a warning?
• http://www.tdwaterhouse.com/index.asp
  The TD Waterhouse discount broker site provides all kinds of free reports to those with an account, and there is no charge to set up an account.
• http://bigcharts.marketwatch.com
  Bigcharts.com is an excellent source of free price history charts for Canadian and US stocks. It also provides technical analysis.

Bruce mentioned the following title as a an example from an analyst who considers the PE Ratio as the most critical criteria for evaluating a company:

Moore, Geoffrey A., Paul Johnson and Tom Kippola. The Gorilla Game: An Investor's Guide to Picking Winners in High Technology. New York: HarperBusiness, 1999.

Marjorie Munroe is an Account Executive with Lexis-Nexis and is the Calgary Director for SLA WCC 2004/2005.