Monday, September 15, 2008

Value Investing Today: Chp 6: Gathering Company Information

Brandes provides some sources of information that will assist investors in answering the key questions of whether they want to own a particular company and at what price. Brandes first likes to understand a company's history, its line of businesses and any recent events that may have significantly affected the price of the stock. After this, if he is still interested, Brandes will do a valuation on the company.

Hoovers ( is a good place to visit to read company profiles and obtain other content (e.g. historical timelines). It offers a free service as well as fee based reports. Valueline ( provides a wide range of financial data on various companies in a compact form. Kiplinger ( has a useful stock finder tool. J.P Morgan offers useful content on international issues ( EDGAR is the place to visit to access current and historical U.S. financial statements (

Understanding how to read financial statements is extremely important for investors. Brandes shares a few things to watch out for when reading the financial statements. On the balance sheet, keep in mind that adjustments to assets will have an impact on shareholders equity (book value) and in turn could have impact important ratios such as the debt to equity ratio. Understanding if a company uses LIFO or FIFO inventory method could have a material impact on current assets. Hidden and undervalued assets can significantly increase a company's worth and should be identified. Land is often an undervalued asset since it is on the balance sheet at cost and generally appreciates over time. Also, research and development is often recorded as an expense even though in many cases it really represents an asset.

With the income statement, focus on identifying a company's sustainable earnings. Don't focus too heavily on earnings in any one period, but rather normalize earnings over multiple periods to get a better indication of a company's earning power.

The cash flow statements should be analyzed to get an understanding of whether current operations can sustain or increase cash to the company. A company with frequent negative cash flow could prove fatal and investors are well-advised to be wary of this condition.

Reading the notes to financial statements will provide more detailed financial disclosure. Review the auditor's report carefully to see if the opinion is clean or qualified. Qualified opinions should act as a warning and investors should proceed carefully. Read the proxy statements to get an understanding if management is acting in a fair manner or if they have been over-indulging through their salaries and through special company transactions.

1 comment:

Avatar said...

I couldn't agree with you more. A comprehensive analysis of the financial statements is important.

Focusing too much on earnings may not give one a complete view. IMHO, my opinion on how it should be done is posted here.

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