Investing Your Money Wisely: How To Interpret Company Reports

Ditch the software crutches. Software is not a substitute for critical thinking. Break down the logic in the software (how, what and why). Black box software cultivates an addiction for repeatedly mindless subscriptions. Break the habit, trust your logic to reason – you have profitable trades that you thought through yourself. As you “outsource” the administrative tasks associated with trading (e.g. record keeping of trades), do not outsource your brain.

No hard-and-fast rule will tell you how much debt is appropriate for a particular company, because levels of indebtedness can vary across industries. To get an idea of whether a company is overburdened by debt, divide its assets by its equity. The result is the company’s financial leverage.

A cash flow analysis can also show you cycles in your business. This can be a valuable forecast of business expenditures like marketing costs to support a big sale. If the sale is a success then you will see cash come into the business and you can form a plan to use it for continued growth. By tracking and trending the business cash flow by month, it will make it easier for you to plan your business next year.

By researching a company’s product line, you can tell where its profits come from. Their annual report is the best source for this information. Check the company’s SEC filings for additional information, like the shareholder letter or the presentation of the company’s product lines.

Sell assets that are already idle. These may be in the form of old machinery or equipment and it may also be other forms of property. They may be old and may have slowed down the operation of your business, but if they’re still usable, you might as well sell them to finance your business.

It’s also important to see how the company uses that cash. Digging into the cash flow examples to find out where the money’s going can shed light on management’s strategy and give you additional insight into the company’s future. Is it building aggressively for the future by opening new stores or building new manufacturing facilities? Is it buying other firms, paying off debt, building up cash reserves, buying back stock, or paying dividends?

There are many ways to dissect and collect the data. Hopefully, you have made this a part of your regular monthly data collection and analysis process. If you haven’t done it yet, you need to start.