How to Unearth Details about Companies from Regulatory Filings

For online investors, financial websites are missing a great deal of textual information contained in companies’ annual reports. Read the company’s regulatory filings to get the full picture. You can glean some interesting details about the company if you take the time.

Find the nitty-gritty company description

Most 10-K filings contain a company overview section. This overview goes into exhaustive detail about the company’s business. For instance, a company can outline what countries it has facilities and employees located in. The company might also break out what parts of its business are the largest.

If you’re investing in a large diversified company like General Electric, which is involved in many businesses, you can get a grasp of the company’s entire empire from the company overview in the 10-K. The company overview might also show you what parts of its business are the largest and most profitable.

Get details on company announcements

When a company has an important event — referred to by investment pros as a material event — the company is required to tell shareholders about it. Companies might inform shareholders by issuing a press release. But it must also provide details of the announcement to regulators in the form of a Form 8-K.

Find out whether the company is being sued

When companies put out glowing press releases about their new products or services, they rarely bring up news about the lawsuits they might be facing. Although most lawsuits end up amounting to nothing, they’re something you want to be aware of. Nearly all companies’ 10-Ks contain a Legal Proceedings section that lists pending lawsuits and says how serious the company thinks they are.

Get the truth from management

CEOs and top management must include in their company 10-Ks a section called Management’s Discussion and Analysis, or MD&A. This is where the company must tell regulators how the year went and give its honest assessment of how the business is performing.

Many professional investors read the MD&A section from the prior year before reading the one from the just-completed year and compare the two. It’s telling to see what forecasts management made in the previous year and then find out whether they came true.

See whether the company has gotten into a tiff with its auditors

Companies must hire accounting firms to look over, or audit, their annual financial statements. Typically, the accounting firms study the company’s results and sign off with a Good Housekeeping seal of approval. But periodically, the auditors find a problem, and that’s something you want to know about as an investor.

You can find out about accounting problems by opening a company’s annual report and searching for the word restatement. A restatement usually outlines any problems the company or its auditor has found with the accounting. Restatements can be a real shock to investors because they mean companies might not have earned as much money as they previously said they did.

Weigh the risk of failure

One of the biggest reasons to bother with reading financial statements is to look for red flags or warnings of trouble at the company. One of the easiest signs of trouble you might find, albeit late, is when auditors warn that they question whether the company can continue as a “going concern.” If you see these words in a company filing, take notice.

See what the company is worried about

Companies must include a Risks section in their annual reports. These sections are stuffed with blanket statements about all the bad things that could happen. Sometimes the company will point out a risk it faces that you might not have thought of. Just search for the word risks.

Assess how much the company’s management is getting paid

When you’re searching through the company filings, don’t overlook the boring-sounding DEF 14A. These reports, more commonly called proxy statements, are about the juiciest reading you can get about a company. These statements are among the most frank documents released by a company because they disclose how much the company executives get paid.

You can download them by using the same steps used to download other regulatory filings, but the SEC explains specifically how to download company proxy statements. The proxy statement also contains details about what other perks executives receive, such as paid-for apartments and personal use of the corporate jet.

Determine how independent the company’s leadership is

A company’s board of directors is supposed to be the shareholders’ champion in the board room. The board is a group of business experts, elected by the shareholders, to represent them at important company meetings. All pay packages and strategic decisions must be approved by the board, so you want to make sure that the board represents the best interests of the shareholders.

The proxy statement is an excellent source of information about the company’s officers and board members. You almost always find a Related Party Transactions section, where the company must disclose any insider dealings between the company’s officers, directors, and the company itself.

For instance, if a board member’s firm has a business relationship with the company, you’d want to know because it could skew the board member’s judgment. With the proxy statement loaded on your screen, just search for the terms related party transactions.

You might also want to know how cozy members of the executive team are with other executives. BusinessWeek makes that a snap to figure out. Just enter the company’s ticker symbol into the Company Lookup text field and then click the Go button. Next, click the People tab on the new page that appears.

You can see whether the officers and directors have professional relationships with other company executives, either by sitting on other company boards or being part of the same organizations. These relationships are counted and displayed in the Board Relationships column.

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