Follow the money: How to decipher financial reports and better cover your industry

Two sessions at this year’s ASBPE national conference in Chicago dealt with foreign languages – that of corporate financial statements.

Ceci Rodgers, a business and economics lecturer at Medill School of Journalism, Northwestern University, walked editors through the nuts and bolts of financial reporting and sorting through the often confusing (sometimes on purpose) world of 10-Qs, 10-Ks and 8-Ks.

“If you can read a nutrition label or a stock quote, you can read this,” Rodgers said.

She recommends editors skip past the “PR garbage” and go straight to the tables on the forms, highlight the lines of information they need, and only then go to the PR/analyst section for explanations from the company.

BREAKDOWN. Rodgers broke down the three most common financial reports journalists and editors deal with:

10-K – annual report

  •  Offers some MD&A (management discussion and analysis)
  • Focus on the footnotes, especially anything listed as “other liabilities” or “special entities”
  • This is the only audited report; the 10-Q isn’t

10-Q – quarterly statement

  •  Income statement – measures profitability
  • Balance sheet – financial health
  • Statement of cash flows – focus on the cash from operations line

8-K – disclosure of information material to the company

14-A – deals with executive compensation

STORY IDEAS. Think there’s nothing in that mass of numbers, percentages and analyst double-speak? Here are some story ideas you can easily pull from a company’s 10-K or 10-Q:

  • How much income tax does the company pay?
  • How much cash does it have on hand?
  • Does it face any pending litigation?
  • What’s the status of its pension funds?
  • What are its “other” liabilities or assets?
  • Is the company “channel stuffing” – moving a lot of product to retailers or distributors and listing it as sold on their books?

WHERE TO LOOK. The 2002 Sarbanes-Oxley law mandates companies follow GAAP (generally accepted accounting principles) that allow journalists and analysts to make apples-to-apples comparisons of companies in the same industries/segments. That doesn’t always make it easy, but Rodgers recommended b2b editors focus on three areas when quarterly and annual reports are released to the media:

  • Income statement – how profitable is the company?
  • Balance sheet – What is the financial health of the company?
  • Statement of cash flow – How much liquidity does the company have?

I – income statement

  • A company’s top line is its total sales plus revenues.
  • Operating income focuses on profit without interest or taxes and tells you how the company is doing in its everyday business.
  • EBITDA (earnings before interest, taxes, debt and amortization) “takes the noise out,” Rodgers said, so analysts like it as a metric to judge the company’s performance.
  • The cost of goods sold (or COGS) shows the impact of commodity costs on business.
  • Sales and G&A expenses – compare this to the same three-month period from last year. If this rises too fast, cost cutting and layoffs might be imminent.
  • Gross margin = revenue minus COGS divided by revenue

II – balance sheet

  • Assets are cash and short-term (three-month) securities. Look for a trend here; are they building cash or not?
  • Goodwill should be less than 20% of total assets?
  • Liabilities are long-term debt (one year or more).
  • Market capitalization = stock price x shares

III – Cash flow

  •     Good ratios of operating cash to net income are 1:1 or 3:1

Author Chuck Bowen is a 2011 ASBPE Young Leader Scholarship award winner, and editor and associate publisher of Lawn & Landscape magazine. You can email him at cbowen@gie.net.

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