Read Quarterly & Annual Reports – Successful Investing [Issue#02]


Now that March has passed, companies have finished reporting annual results for last year and are busy preparing to release Q1 results in the April-June time frame.  Its a good opportunity to catch up on reading the reports that are related to your investment holdings and potential investment candidates.  Reading quarterly & annual reports help investors to gain more information & accumulate knowledge. Other benefits include insights and details that are not usually mentioned in press releases.  Such information will help investors to make better & safer investment decisions.  I consider this activity to be one of the keys to successful investing and will highlight exactly how it benefits your investments profits.


Important But Often Ignored By Individual Investors :

Reading the company reports (quarterly and annual) are one of the simplest things an investor can do that will return the greatest benefit.  Yet, many individual investors tend to skip it, opting to instead follow the stock’s price movement or read “financial pornography” related directly/indirectly to buying/selling the stock (How you can retire off it,  How it’s the perfect stock,  How the stock can make you rich,  Whether or not you should invest in it,  Its dividends,  Why it should be in your portfolio,  etc).

Investors also convince themselves that they are doing enough just by reading quick summaries & highlights posted by various news sources, rather than reading through the reports themselves. The number one excuse given is that it takes too long and they don’t have the time.  However, consider that its likely to take a much longer time to re-accumulate lost investment capital from bad investment decisions or a lack of taking necessary action, as a result of not reading crucial information contained in the report!  A few bad decisions, and the financial losses become quite large very quickly, and difficult to recover from.  Summaries & highlights are great sources of timely information, but are not substitutes for actually reading the reports.


Benefits Of Reading Quarterly & Annual Reports (Awareness & Insight – Better Decisions) :

The main purpose of reading the quarterly & annual reports is to gain information & knowledge.  Reading them helps an investor gain insight into the business itself in terms of growth, current health, direction of the business, etc..

The reports usually detail potential negative and positive issues, and other factors that may have an affect on future performance/results, as well as the industry in general.

• Current success – they are doing what you want them to do, business operating as expected, building strengths, etc. [Examples – project milestones, company milestones, market share, efficiencies, early stage successes, etc.]
• Current issues – what they are, what area of the business is being impacted, challenges, associated risks, weaknesses. [Examples – bad debts, write-downs, government regulation changes, labour strikes, material cost increases, new competition, disruptive technologies, etc.]
• Insight into upcoming quarters or year(s) – growth initiatives, direction, industry challenges & issues. [Examples – Patent cliffs, cost cutting plans, large expansion, loan losses, M&A, entry into new industry or business, etc.]


Insight Allows Investors To Determine The Impact Of Issues :

• How each aspect impacts the business.
• How long the impact may be (lasting or temporary?).
• How the intrinsic value may be affected.


Details Not Mentioned Elsewhere:

Perhaps one of the most beneficial reasons for investors to read the reports, are that significant details are found in them, that are often not mentioned elsewhere (not in regular press releases, news articles, or analyst comments):

• Certain qualitative details (ex: strategic initiatives) whose importance and significance cannot be conveyed by earnings headlines or numbers, as they simply have not yet had an effect on the numbers yet.
• Certain quantitative information (numbers, metrics, etc.) are often not stated in headlines or press releases (numbers too detailed or specific, not a main indicator), but are significant to the investor and can only be found in the reports.


Information & Insight Allows For Better Investment Decisions:

The details contained within quarterly & annual reports, whether quantitative or qualitative, are just as important as the main financial results, as they enable the investor to make informed & better decisions: 

• Capitalize on opportunities at earlier stages.
• Awareness allowing for decisions to be made in order to reduce risk of loss (risk mitigation).
• Better able to judge business/operating performance of company, as well as compare against its peers using a number of metrics.
• Being able to act on negative issues or can determine if an investment is worth investing in.  May allow you to dispose of or reduce investment exposure at a more favorable price (rather than a less favorable once issue becomes larger and makes headlines).
• Intrinsic value calculation may change in light of information – current stock price may be trading higher/closer or lower/further to updated intrinsic value, which may justify adding to or reducing/selling the investment.
• etc.


Beginners Understand Less But Gain A Lot :

Beginners have much to gain and benefit from reading reports.  It helps them become familiar with the format and regular content contained within reports, the details of the specific company’s operations, and the management team. The biggest benefit is in terms of risk mitigation. Both Benjamin Graham and Warren Buffett continually remind investors that “risk comes from not knowing what you are doing”.  Being ignorant of the business and issues related to it (that can be found in the reports) increases the risks significantly.


Recommended Approach :

Investors should get into the habit of reading quarterly & annual reports from each investment holding cover-to-cover. It is the minimum necessary ongoing due diligence.  Most are downloadable from website as a pdf found on the company’s website (Investor Relations section).  Just read it, and don’t worry if you don’t understand every single item being discussed or presented.  Rather, don’t let that be an excuse not to read it! You will still learn something and gain valuable information. Investors will gradually become more familiar the format, content, and language. You will gradually know what to look for, as well as be able to identify the tone of the report (positive/negative).

There is no set rule as to what to look for, as it is highly dependent on the specific stock/business, as well as investor preference (some may like to concentrate on a specific metric more than others for various reasons). However, many investors will choose to skip the mundane numbers & financial statements.  But they are a must read!  Reading the numbers rather than just Management Discussion & Analysis (MD&A) is important because some items may not be discussed, but tell a lot.  Numbers can give insight into what is happening and the changes in the level of risk.  Some examples include:

• Debt levels of casino/gaming companies. The debt levels showed that many gaming businesses borrowed huge amounts of money (too much) to fund casino property development.  One nay not know if it came from cash on hand, without reading the reports.
Increasing loan loss reserves and detailed loan breakdowns.  Prior to the financial crisis in 2007, many investors could have saved themselves from heavy losses if they had taken the time to look at these numbers!
ncreasing credit costs! Increasing debt ratios!


Additional Tips:

• Many qualitative issues are in the management discussion and analysis section (MD&A).
• Quantitative data, are in tables or charts as well (you can get a quick picture of things from looking at these tables).
• Numbers that matters for specific industry. [Examples – NIM is important for banks, FFO for Real estate investment trusts, etc.]
• Financial data – Look at absolute numbers, but also compare with previous year and/or previous quarter (relative).
• Be aware that results can sometimes be important, while at other times not. [Examples –  Seasonal/cyclical fluctuations, real issues or large improvements/decline?.  Disposition of some assets may temporarily increase profit, write-downs may temporarily decrease profit.  These may not be indicative of the true operations of the business.  Net operating income, sales revenue, etc.]
• Have some questions in mind that you want answered before reading, so you also look for the answer in the report.
• Look for red flags, financial performance, and strategic initiatives.


A Few More Specifics (among other things) I Usually Look For :

• REITS: cap rates on new properties, refinancing rates on properties, sources of financing, tenants, same store sales per sq ft, leasing activities, etc.
• Financial Firms: loan loss reserve ratio, capital ratio, NIM, etc.
• Production capacity, production output.
• Revenue growth of specific products/services in specific geographic markets.
• New strategic initiatives/changes, marketing efforts, etc.
• Sources of financing & revolving credit lines, and corresponding rates.
• Management’s tone (positive/negative) & outlook.

These are just a few specific items to give you an idea. There are just too many to list.


Use Time Saving Tools:  Use time saving tools such as Evernote and Read-It-Later.  You can save & store the reports or read them later (without having to re-download or search for them again).

Earnings Conference Calls:  I also recommend listening to earnings conference calls, particularly the management Q&A session.


Insight Makes A Big Difference :

One small piece of information found in a quarterly or annual report, can make all the difference between significant investment profits or losses.  This information & insight, allows you to not only see where the ball was and is currently, but where it is going to be.  In investing, that is something you need to know very well, which you can accumulate from reading the reports.  It is an activity that helps to achieve consistent investment returns.


Note: I mention stocks, but the benefits are not limited to just companies related to your stocks.  They also apply to the corporations that issue corporate bonds, trust units, or shares of a private business, etc. Most general principles apply to all areas of investing.


Please read: The Successful Investing Series Introduction.
Real investment tips that work. This series is intended to help people become a more successful investor, increase returns, and sustain them over the long term.

Thanks & Happy Investing! – © 2012


2 thoughts on “Read Quarterly & Annual Reports – Successful Investing [Issue#02]

  1. An excellent piece of sound fundamental investing advice. Always remember that you are becoming a part owner of the company, so you should always make yourself aware of exactly how the company is performing in order to make sound investment decisions. Thank you.

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