Clues in Financial Reporting Analysis
I want to preface this question by stating I understand that there is no such thing as an apples-to-apples comparison cross-industry. That being said, I wanted to see if any analysts had anything that they generally look for when evaluating a new business off the bat — good or bad — when reading their financial reports (10-K/Q, 8-K, S-1/4, Press Releases, etc)? This could be a more quantitative, financial statement focused data point (Days in accounts payable, Cash conversion cycle, Specific profitability/liquidity ratios, etc) or more qualitative (Unresolved staff comments, Specific footnotes, Accounting policies, etc). In other words, I’m curious to see if there’s any data point/process that could help drive a more holistic analysis or provide clues on strengths or weaknesses of the company? Thanks in advance for your insight!
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Unfortunately it’s much more complicated than that.
1) It’s very Industry dependent.
2) you then need to compare to peers
3) you then need to figure out valuation and if the stock is a buy or sell based on expected return which is largely irrelevant of business quality.
A lot of guys like ROIC which you’ll have to calculate yourself. It looks at the returns that assets are generating irregardless of capital structure. High ROIC is sign of a moat / good business.
That’s helpful. I appreciate the added color!
cash flow seasonality driven by working capital and not obviously connected to seasonality in the business (Apple should have strong 4Q seasonality, but if Verizon does then management is playing games)
heavy reliance on non-GAAP metrics, especially adjustments not made by peers
for a mature businesses, big gaps between FCFPS and EPS, especially if hard to explain
I also like the 'emphasis of a matter' from the audit opinion. It doesn't mean management has done anything wrong or is doing its accounting aggressively, just tells you what the auditor thinks the most critical accounting policies or nuances are - is it revenue recognition, inventory cost capitalization, impairments?
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