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Stocks in Depth
by WealthEffect Staff
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Financials

This a difficult section — don't be discouraged. You might want to skim it at first and return to the more challenging articles later.

 
 
Accounting Rules
 
  Consistency and objectivity are the goals  
  Historical, accrual accounting is the result  
  Some shortcomings in a World According to GAAP 
 
Company Reports
 
  The Annual Report records a company's results during the preceding year  
  The 10-K provides more details on products and competition  
  The 10-Q reviews quarterly results  
 
Reading an Annual Report
 
  Begin (at the end) with the accountants' report  
  The letter to shareholders highlights the priorities of senior management  
  Management's Discussion and Analysis reviews actual performance  
 
Income Statement
 
  The income statement (or statement of operations) is included in the company reports  
  Revenues, costs, and profits are reviewed  
  Details, beyond the numbers, are available in Management's Discussion  
 
Balance Sheet
 
  The balance sheet is a "picture in time"  
  Assets  
  Liabilities  
 
Financial Ratios
 
  Profit Margins  
  Interest Coverage  
  Operating Working Capital  
 
Cash Flow
 
  Gross Cash Flow minus...  
  Capital Expenditures & Working Capital equal...  
  Free Cash Flow  
 
Capital Expenditures
 
  Capital expenditures (Cap ex) fall into two categories  
  There is a difference between necessary and discretionary cap ex  
  This is not an exact science  
 
Currency Markets
Introduction
 
  Currency affects corporate profits  
  Currency affects the trade between countries  
  The value of a dollar is based on what it can buy  
 
Advanced
 
  How interest rates affect currencies  
  How purchasing power affects currencies  
  How the real world affects currencies  
 
Acquisitions
Part I
 
  Acquisitions are an integral component of business strategy  
  A pooling-of-interests occurs when the buyout is paid in stock  
  A purchase occurs when cash is paid  
 
Part II
 
  Goodwill amortization should be ignored  
  In-process R&D should, as well  
  The SEC and the FASB — the new cavalry?  
 
Company Options
Part I
 
  Company options are not ordinary stock options  
  Company options are designed to motivate  
  These options are more expensive than shareholders realize  
 
Part II
 
  The benefits of company options are overstated  
  The true costs of these options are understated  
  The costs vary widely from company to company  
 
Part III
 
  Valuing options begins with the footnotes to the annual report  
  Multiply the number of options granted times the value of each option  
  Compare this total cost to the company's total profit  
 
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