AAII Journal > April 2005
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Taking the Spin Out of Earnings Announcements

Public companies always want to put the best face on their quarterly financial results—that's just human nature.

But it doesn't mean an investor needs to be distracted by excessive 'spin' or downplaying of less favorable information that may in fact be critical to seeing the complete picture.

While the SEC filings (called 10-Qs for quarterly reports and 10-Ks for annual financial filings) are mandatory and there are specific rules about what must be reported in them, news releases are not mandated by law. In fact, companies have a great deal more flexibility about what they disclose in their earnings press releases. For this reason, investors should be cautious of earnings news releases that typically precede the financial reports filed with the Securities and Exchange Commission.

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Consider this extreme example: Among the 30 companies that make up the Dow Jones industrial average,

  • Just over one-third of the companies do not issue a balance sheet along with their income statements when they issue their earnings news releases, and

  • Almost half do not issue a cash flow statement until later.
Analysts consider the three financial statements—the balance sheet, income statement and cash flow statement—taken together to be critical in gaining an accurate picture of a company's position. But too often they have to wait until weeks after the company's earnings announcements, when the companies file their 10-Ks or 10-Qs, to look at the other two financial statements. By then, the announcements are under the radar screen of most media.

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