IMPORTANT SECTIONS IN FINANCIAL FILINGS VALUABLE FOR FUNDAMENTAL ANALYSIS

 

Where investors often look for financial statements in fundamental analysis to be on the path for a better investor, there are more statements and information that are available in company’ annual and quarterly SEC filings that can provide additional information to investors about a company. Here are some other noteworthy sections: 

Management discussion and analysis

Sample MD&A

A company’s management usually describes the background of the company and talks about the recent year as an introduction. Management providing details on the company in few pages are called management discussion and analysis (MD&A). MD&A helps investors in getting sufficient information on a company and mention the areas in which the company has performed better as well.

 However, not all details are mentioned by the management of a company since they are willing to provide details to maintain a company’s goodwill and performance. Hence, management analysis is not expected to mention negative aspects of a company.

Investors can go through the following in MD&A:

  • Look for the accuracy in managements comments.
  • Are financial trends covered in past few years mentioned?
  • Are potential risk and uncertainties mentioned?

Auditor’s report

The auditor is the one who delivers an opinion on the accuracy of financial statements of the company and hence aims to provide thorough disclosure. This all goes into the auditor’s report which can sometimes be termed as a report of independent accountants. Auditor’s report evaluates the company and recognizes facts that can hinder the credibility of financial statements. Auditor’s report ensures that are no errors in the company’s financial statements, hence an auditor is supposed to reflect a true picture of the company and its financial statements and can also mention any additional information about the report. Companies that trade in stocks or bonds on the exchange are required by law to have their annual reports audited.

Independent Auditor\’s Report 
Paragraph 1 

Describes responsibilities of auditor and directors along with mentioning areas that were audited in financial statements.

Paragraph 2 

Specifies how generally accepted accounting principles are applied along with areas that were examined. 

Paragraph 3 

Auditor’s opinion on the audited financial statements.

 Investors should rely on auditor’s report as audits provide integrity to financial figures announced by the company. Also, investors should be aware of financial statements that do not have approval stamp of an accountant.

Notes to Financial Statements

The notes to financial statements connect loose ends by providing an overall complete analysis of a company. These are actually the footnotes that aim at connecting everything related to a company. Hence, in order to acquire full information, investors along with reading income statements, balance sheets, and cash flow statements should also give attention to footnotes that carry enough information about a company such as outstanding leases, maturity dates of outstanding debt etc.

Footnotes are of two kinds:

Accounting Methods – In this kind of footnote, accounting policies are identified and mentioned that are important for investors to know about the business of a company. This is ideal for investors to read if there has been any change in the company’s accounting policies and hence investors must be aware of any new policies adopted.

Disclosure – This footnote aims to provide additional disclosure that has not been disclosed elsewhere in financial statements. It provides a better idea to investors about many areas such as borrowing costs by mentioning maturity dates and interest rates of debts. Also, information like pension plans liabilities for employees, details for legal proceedings and much more are disclosed in this footnote.

Footnotes can provide insights into the company to investors that can be found nowhere else. This information can be a valuable source of information for investors that can increase their odds of success and provide better investment options.

Investors are advised to pay close attention to every detail that a company discloses to know company’ stability by analysing thoroughly all the financial statements and other mentioned information. Investors can get their hand on information such as borrowing capacity, future growth plans, investment options, return available and past record from the financial statements and other information.