Fundamental Analysis
Notes to the Financial Statements
The notes to the financial statements (sometimes
called footnotes) are also an integral part of the overall
picture. If the income statement, balance sheet, and statement
of cash flow are the heart of the financial statements, then
the footnotes are the arteries that keep everything connected.
If you aren't reading the footnotes you're missing out on
a lot of information.
The footnotes list important information
that could not be included in the actual ledgers. Could you
imagine if the company listed out individual expenses on the
income statement instead of putting them under one or two
neat headings? The income statement would be 20 pages
long!
The notes will list relevant things like
outstanding leases, the maturity dates of outstanding debt,
and even details on where the revenue actually came from.
Generally speaking there are two types of footnotes:
- Accounting Methods - This type
of footnote identifies and explains the major accounting
policies of the business. This portion of the footnotes
will tell you the nature of the company's business, when
its fiscal year starts and ends, how inventory costs are
determined, and any other significant accounting policies
that the company feels that you should be aware of. This
is especially important if a company has changed accounting
policies. It may be that a firm is practicing "cookie jar
accounting" and is changing policies only to take advantage
of current conditions to hide poor performance.
- Disclosure - The second type
of footnote provides additional disclosure that simply could
not be put in the financial statements. The financial statements
in an annual report are supposed to be clean and easy to
follow. To maintain this cleanliness, other calculations
are left for the footnotes. For example, details of long-term
debt such as maturity dates and the interest rates at which
debt was issued, can give you a better idea of how borrowing
costs are laid out. Other areas of disclosure include everything
from pension plan liabilities for existing employees to
details about ominous legal proceedings the company is involved
in.
The majority of investors and analysts read
the balance sheet, income statement, and cash flow statement.
But for whatever reason, the footnotes are often ignored.
What sets informed investors apart is digging deeper and looking
for information that others typically wouldn't. No matter
how boring it might be, read the fine print, it'll make you
a better investor.
|
Previous 
