• Financial Statements
  • Taking a Qualitative Look at a Prospective Stock’s Figures

    by Joe Lan, CFA

    One of the first steps taken by investors when researching stocks is to spend time looking at a firm’s financial statements—specifically, the income statement, balance sheet and cash flow statement.

    These financial statements provide investors with figures for revenues and earnings; a summary of assets, liabilities and shareholder’s equity; and the uses of cash. Quantitative analyses of these figures are a good starting point, but when it comes to investing, it is important to remember that financial statements and ratios do not always tell the full story.

    While most investors take the time to understand the quantitative element of investment research, a qualitative assessment of the figures enables investors to better judge the company as a whole. It provides an understanding of the driving factors behind the numbers and allows for a clearer judgment on a firm’s prospects going forward.

    A good resource for conducting qualitative analysis is the Form 10-K. This is an annual filing required from public companies by the Securities and Exchange Commission (SEC). The 10-K provides a comprehensive overview of a company, including its business, management, financial performance, legal proceedings and debt obligations. Though lengthy and detailed, the document can reveal important information for those who know where to look. Other useful resources include the company earnings reports and conference calls with analysts. A company’s annual report and investor presentations can also elicit useful, qualitative information. Annual reports and investor presentations can usually be found on company websites. You can find company 10-Ks using the EDGAR database on the SEC website (www.sec.gov/edgar/searchedgar/companysearch.html). In the database, you are able to search any company by name or ticker (Figure 1). The company page on EDGAR shows a sample of the filings with a link to download each document (Figure 2). You can also search for a specific filing on the company page.

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    Joe Lan, CFA is a former financial analyst for AAII.


    Doug from NY posted over 3 years ago:

    >The SEC filing for the proxy statement is DEFA14A.

    I think this is a typo. The proxy statements are DEF14A. If the proxy statement gets AMENDED, then that is a DEFA14A.

    (I've looked through proxies avidly, ever since I heard that Walter Schloss used them!)

    Bob Houle from Florida posted over 3 years ago:

    Superb article and the "Qualitative Analysis Factors" table at the end truly reflects the author taking the extra effort to make sure the reader pulls out all the "jewels of advice" in the article. Well done. Thank you.

    Tom Huggler from Michigan. posted over 3 years ago:

    As an investor new to the analysis of individual companies, I found this article to be exceptional. Thank you for writing it in a clear and cogent manner. It will become my blueprint and, by itself, is worth the cost of membership in AAII.

    Douglas Sewall from ME posted over 3 years ago:

    Excellent article, thank you!

    Douglas Sewall from ME posted over 3 years ago:

    Excellent article, thank you!

    G Muren from CT posted over 3 years ago:

    Thank you for such a clear and detailed guide and the outline table to check with.

    L Toll from CT posted over 2 years ago:

    Excellent article for all investors to read and use. Please tell me how to find out when conference calls will be held.
    thank you

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