Understanding Stocks

IT’S REALLY FUNDAMENTAL: INTRODUCTION TO FUNDAMENTAL ANALYSIS 93
company. In addition, because of the way insider transactions are
reported, you may not find out what insiders are doing until it is too late.
For example, while the CEOs of Enron and WorldCom dumped millions
of shares of stock in their companies, their action wasn’t made public
until the stocks were trading for pennies a share (insider reports are
sometimes delayed by up to 3 months).
The Balance Sheet: Uncovering the Truth about a Company’s Finances
A balance sheet is a report of the financial condition of a business,
including items that only an accountant could love. And yet, to really
understand the company you have invested in, you should study its balance
sheet.
Unfortunately, most people buy stocks without taking the time to
read the balance sheet. Just remember this: You shouldn’t waste thousands
of dollars investing in a company unless you know a few facts
about it, like how much the company earns, how much it spends, and
how much it owes. When you have found out the truth about a company’s
earnings, expenses, and debt, you’ll have a better idea of
whether you should buy its stock.
The balance sheet is found at the back of a company’s annual
report. You can also find any company’s balance sheet by registering
free at www.businessweek.com. Type in the stock symbol and select
SEC filings. You can also log on to Edgar Online, a subscription-based
service that allows you access to all SEC filings, including the quarterly
10-Q filing and the annual 10-K filing.
Let’s take a quick look at some of the items on a balance sheet
(which by no means includes everything):
1. Assets (what the company owns, such as cash, property, equipment,
real estate, and accounts receivable)
2. Liabilities (what the company owes, such as declared and unpaid
dividends and accounts payable)
3. Shareholders’ equity, or net worth (assets minus liabilities)
Let’s take a look at Bright Light’s consolidated balance sheet,
shown in Figure 9-1.