Do Investment Analysts READ Annual Reports?

[ralph124c]

As a shareholderin several large corporations, I get annual reports mailed to my house. I have attempted to read them, and most are hugely complex! You learn about currency hedging, swaps, inventory writedowns, etc. My question: is there a computer program that can read these things and pick out "red flags" that investors should be aware of? I can't imagine a human anaylst reading hundreds of these things..they are very long, boring and complex!
Still, somebody picked up what afraud ENRON was (I belive it was the item in their report that talkefd about the "bandwidth trading"-which was a totally bogus business!
Anybody know how toread these quickly, and get the salient points??
What are the "red" flags that signal a corporate meltdown?

[bump]

Well... financial analysts do read those things. That's their job(awful as it sounds). They get paid to understand that stuff about the companies they analyze. They also do a lot of conference calls, road shows, etc... Basically the more information they can get, the better analysis they can do, and the better prediction they can do.

As for reading the things, the meat of the things is usually in the actual financial statements(bal. sheet, income statement, and statement of cash flows).

Of those, the statement of cash flows is probably the most important- it records the company's inflows and outflows of cash. According to my accounting & finance profs, the generation of cash is probably the best thing to look at- if a company doesn't make money, they're in trouble.

[FranticMad]

If a large company is in trouble then the CFO knows it, and he or she is fully aware of the impact that a negative annual report can have. So, despite the existence of GAAP, the annual report is then created in collaboration with experts in accounting who can reclassify expenses and capital expenditures so you can't really tell what the truth is. They can interpret accounting principles to defer losses to the next report, among a thousand other tricks. A large corporation will always be ahead of your ability to know what's going on. Caveat emptor.

On the other hand, if you're looking at a smaller business I agree with bump. Look at their cash position, debt-to-equity ratio, working capital. Stuff like that. See how much money they have in the bank, and how fast it is coming in and going out.

Can a computer program do it? Not really because, as I mentioned in my first paragraph, the original numbers are derived using human judgement and creativity. Most times you have to read the footnotes to get a hint of the real story.

[bump]

FranticMad made the point I was trying to make- accounting chicanery can make income statements and balance sheets misleading, but the cash flow statements are much harder to lie on.

You'd probably do really well to take a course in financial statement analysis or even basic managerial accounting at a local college- they explain a lot of this stuff in great detail.

[Jackknifed Juggernaut]

The cash flow statement is probably the the best information that you'll get from the financial statements themselves.

Don't pay too much mind to the cash balance, since most properly-managed companies try to minimize cash. Cash sitting on your books is really an uninvested asset creating little value. Cash flow from Operations and Investing Cash Flows are the parts to look at. Financing cash flows don't give you much information on performance.

But the Notes to the financial statements are very important, as is the MD&A (Management Discussion and Analysis).

You really should take a class in Financial Statement Analysis as bump suggested.

[ralph124c]

Appreciate the inputs..I just got a few mutual fund statements..and by golly, do they have creative accounting! on one of them, a little footnote explains that:
"losses in this account have been scheduled to be REALIZED IN FY 2007"!!!
Howon earth can you lose money on an investment (i.e. sell it at a loss) and yet not record the loss for 4 years?
Anybody an accountant? Is this legal?

[Wyld Stallyn]

Howon earth can you lose money on an investment (i.e. sell it at a loss) and yet not record the loss for 4 years?

IANAA, but this looks like "amortization". You can do this with some overhead costs as well. There's lots of tricks.