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This article,
by Parmelee Eastman, Job-Hunt's Research Pro, is from the November
10, 2004, issue of Job-Hunt's free twice-a-month e-mailed newsletter,
the Online Job Search Guide.
For more articles in this series, go to the Company
Research Pro page.
This article
focuses on public companies that are required by the U.S. Securities
and Exchange Commission to publish quarterly and annual financial
statements including the income statement, segment and/or geographic
breakdown, balance sheet, cash flow, and notes on accounting practices.
Researching private companies and non-profit entities will be examined
later in this series.
What Can
You Learn?
Analyzing the
recent financial picture helps you understand why the firm might
hire you and what the goals and environment of the firm might be.
While the past financial performance does not guarantee the future,
the insight does help predict it.
Why Are They
Hiring?
Is the job you
want a replacement person for an essential job? A revenue-generating
sales position (which might be very pressured)? How likely is the
company to be able to provide you with advancement possibilities
and pay raises, or even stay in business? The company's profitability
picture can give you insight into what may be happening and why.
What's the
Trend?
Let’s
look at the company's annual report, audited financial information
required of all U.S. "C" corporations by the SEC, often
available on company Websites or at libraries. The income statement
shows the revenue received by the company for the most recent year,
the prior one to four years, and the previous eight+ quarters. What
is the trend in revenue? Essentially flat, steadily rising, erratic,
or down? And what does the Management Discussion reveal about the
reasons for changes in revenue? While the firm is barred from projecting
the future in its financial reports, you can gain a sense of the
stability of revenue from the five year trend.
Larger entities
separate revenue and profit by business segment and possibly by
geography (generally too high level to be useful). You can see how
important your area of interest is to the firm overall.
Choosing
Your Part of the Company
Hewlett Packard’s
2011 annual report showed the results for its seven segments. Which
divisions would you like to join? And which would you avoid?
| |
|
Revenue
|
|
Earnings
(loss)
from Operations |
| Enterprise Servers, Storage, & Networking |
|
$22,241 |
|
$3,026 |
| Financial Services |
|
3,596 |
|
348 |
| Software |
|
3,217 |
|
698 |
| Services |
|
35,954 |
|
5,149 |
| Images & Printing |
|
25,783 |
|
3,973 |
| Corporate Investments |
|
322 |
|
(1,616) |
| Personal Systems |
|
39,574 |
|
2,350 |
Is
the Company Profitable?
Profits or net
income for the company are what's left after taxes and special charges
are deducted from total or gross income. Are profits non-existent,
flat, steadily rising, erratic, or down? Why? If the company has
a poor record of profitability, why is it hiring?
Special or one-time
charges or additions for plant closings, increases or decreases
from reserves, or revenue from the sale of divisions can distort
the trends. However, ask yourself if the charges are unlikely to
re-occur or are they symptoms of executive failings.
Assets,
Liabilities, and Cash (a.k.a. "Salary Continuation")
The balance
sheet contains the company’s assets, liabilities and debts,
and equity. How much cash and assets such as accounts receivable
that will turn into cash quickly does it hold in comparison to its
short-term liabilities (this is called liquidity)? What are amounts
of debt and equity or shareholder value? If the debt is high or
the equity low, how stable is this firm? In general, short-term
(less than one year) assets should match short-term liabilities
and long-term assets should match long-term liabilities. If the
company built a manufacturing facility with short-term loans from
a bank, watch out!
Cash flow statements
show the sources of cash such as profits, loans, equity investments,
and how the cash is spent on items including inventory increases,
debt reductions, or stock re-purchases. Accounting rules require
that revenue be recognized or included when the products or services
are delivered. For example, a company cannot include both years
of a two year contract when the contract is first awarded. And financing
such as loans are not included in the income statement—the
interest paid is included.
Cash flow statements
focus on cash in and cash out irregardless of the reporting under
accounting rules. Look at the cash flow statement to see how the
organization obtains enough money to pay its obligations. Negative
cash flows do not always indicate a problem. For instance, fast-growing
entities often consume more cash than they generate internally and
have to use outside financing.
Financial analysts
use ratios to compare companies in the same industry. The "current
ratio" shows the amount of liquid assets to short-term debt.
"Debt to equity" ratio indicates how risky the company’s
financing structure is. Calculating the firm’s ratios and
comparing them to industry averages can indicate variations that
should be investigated. Again, differences do not necessarily indicate
a problem; the firm’s financial strategy or history may have
resulted in non-standard ratios. Reading the notes to the financial
statements can clarify some of the rules and reasons for classifications
of items.
A Word of
Caution
No single financial
figure or ratio stands alone. Insight into the financial health
of the company comes from analyzing the pieces together to discover
the true standing of the company. And the financials fit into a
larger picture of the company and its future direction.
© Copyright 2004 - 2012 Parmelee Eastman. Used with permission.
---------------------------------------------
Parmelee Eastman is president of
EastSight Consulting
which helps provide more effective utilization of external information
in internal decision-making processes. EastSight Consulting clients
range from start-ups to Fortune 500 companies. Prior to founding
EastSight, Parmelee was the vice president of the global technology
and communications practice at Fuld & Company and employed for
16 years at Digital Equipment Corporation. Parmelee holds a B.A.
from Wellesley College and an M.B.A. from the Harvard Business School.
She can be reached at peastman@eastsightconsulting.com.
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