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Thursday, March 17, 2011

How finance pros read company reports to assess investments

Financial professionals will read company reports to assess investments in the interest of their organization, function, and objective(s). Some of the financial information reported by a company may include investment data, company objectives, project goals, expansion capacity, and return on investment among other things discussed in this article.

Each financial professional will likely look at corporate reports in a way that is framed by his or her financial goals and objectives. For example, A Chief Financial Officer (CFO) seeking to increase short term return on assets may view a company report in terms of asset turnover. A list of the types of financial professionals who use company reports is below and implies the multiple purposes and uses of company reports.

• Fund managers and actuaries
• Chief Financial Officers (CFO's)
• Securities regulators
• Tax officials, auditors and accountants
• Investors, and venture capitalists
• Financial advisers and financial analysts

Types of company reports


Types of company reports can vary, each indicating different financial information. Some company reports include specific financial information relating to a single financial event whereas others will provide an overview of many financial events. Below are just a few of the corporate financial reports and/or company filings that may be used by financial professionals for a number of reasons.

• Notice of Sale of Securities
• Annual and quarterly reports
• Notice of Exempt offering of Securities
• Financial statements ex statement of cash flow
• Statement(s) of acquisition

The report itself and the objective of the financial professional will often determine how the report is read. For example, a securities regulator may look at a sale of securities filing to confirm the buyer of securities. In such case the documentation verifies information so as to avoid fraud, protect the seller of the securities and compliance with securities law. An analyst may view the same report(s) with different eyes though. For example, if a company has reported securities as sold how does that affect the business in question. Some reports are easier to read than others and how they are read can take on an information gathering purpose.

Quantitative data within company reports


Quantitative data within a company report is essential for assessing numerous pieces of information such as if a company is profitable and how much the profit margin among other things has changed. Depending on the financial professional, company reports may be analyzed heavily or used for key data such as sales, earnings, debt, industry developments etc.

Company financial ratios are also used with information from company reports. In the banking industry ratios are sometimes included in company reports. Ratios measure things like how well the business retains staff, how much debt the company has, how quickly inventory turns over and how much financial leverage there is in a business. Financial ratios are like the vital signs of a corporation and should often meet certain quantitative criteria to be deemed useful to a financial professional.

Statistical analysis is another area of quantitative analysis that can be used for assessing probability, correlation, validity in financial relationships, trends, patterns, distribution and more. Statistics are important in narrowing down estimates for accuracy. Although statistical results are not absolute they can provide extra verifications to analysts and researchers findings which can also be recorded in company reports.


Qualitative data within a company report


Qualitative data is that information within a report that has indirect influence on financial numbers. For example, how a company may be impacted by a new legislation enabling production and trade of a particular product, or approval of a patent by a Government agency, or a marked decline in the number of businesses in an industry may all be considered qualitative developments written in a company report. Qualitative data is also used to assess market conditions and may accompany executive meetings in addition to company reports.

Qualitative data exists when numerical data doesn't. Since business performance is not always numerically determined, qualitative assessment of business operations, market environment, regulatory environment, economic conditions and competition may all be included in an annual report or presentation if considered relevant by the company executives. Qualitative data is sometimes less defined, and more open to interpretation, but can also contain highly useful insights into a business.

Terminology and conditions


Another part of a company report is the legal terminology that may include disclaimers, liability waivers, legal requirements, violations, contractual obligations, legal settlements, lawsuits, judgments and/or rulings. Depending on the type of business this part of a company report may be extensive or brief. A fund manager may look for pending law suit rulings, new law suits, bankruptcy filings, mergers and acquisitions and other legal events that can affect the company. In any case, legal events may be significant part of a businesses activity which may or may not be a good thing depending on the type of event and the type of business.