The Flow Of Company Information
By Bryn Harman, CFA

A basic principle of solid fundamental analysis is striving to find out everything one can about the stock issuer's business. Good analysts and investors search for all material information about a company before starting to do a company analysis project. Gathering information about a company is like turning over all the pieces of a jigsaw puzzle before starting to search for matching pieces. In this article, we'll show you which pieces to look for and how to put them together to solve the puzzle to learn the most about a company.

In the United States, investors are fortunate to have a relatively standardized flow of information from equity issuers. The Securities and Exchange Commission (SEC) has a comprehensive set of rules covering everything from financial statement rules to risk factor disclosure. The SEC also says what companies must present to investors and when they have to do it. For the most part, investors know what to expect and when to expect it. (To read out more about the SEC, see Policing The Securities Market: An Overview Of The SEC.)

Earnings Releases
In the equity investment business, the world tends to revolve around quarterly earnings releases. Four times per year, equity investors deal with earnings season - that few busy weeks every quarter when companies release their quarterly earnings reports. The way companies report earnings varies a lot from company to company and industry to industry. Quarterly earnings announcements generally include unaudited financial statements, discussions about business conditions for the quarter and some type of future business outlook. Some earnings reports are a couple of paragraphs and an income statement. Others are full discussions of business conditions and expectations along with a full set of financial statements. (To see more about these reports, read Understanding The Income Statement and Strategies For Quarterly Earnings Season.)

Earnings releases are important disclosures of financial information and business conditions because they are timely, even though they are often incomplete. Investors usually have enough information in an earnings release to see how well a company met earnings expectations and how close management's financial outlook matches their own. That's key when reviewing the status of a stock you already own. Reviewing historical earnings releases is also important in building a thesis on a stock you are considering for purchase because they help give the investor a sense of the progress of management's business plan as well as management's approach to disclosing financial results. (Keep reading about earnings in Earnings Forecasts: A Primer and Surprising Earnings Results.)

Conference Calls
Most companies also hold an investor conference call on the day of their quarterly earnings releases. Companies typically archive recordings of these on their investor relations websites. Conference calls vary considerably from company to company in terms of disclosure. The purpose of conference calls is to add detail to the earnings release and give analysts the opportunity to ask questions of management. Conference calls can be important sources of information about management's outlook for a business. This outlook is commonly known as guidance. (To learn more, see Conference Call Basics, Evaluating A Company's Management and Putting Management Under The Microscope.)

Forward Guidance
Guidance is management's prediction for the business for the next quarter, several quarters, the fiscal year or several fiscal years. Depending on the company, forward guidance can vary from a full range of revenue and earnings growth rates to simple earnings per share predictions. Some companies give no guidance at all, while others just say they are comfortable with Wall Street predictions.

Investors must be aware of management's outlook and must also be aware of how well management has done with its earnings predictions in the past. While definitely not the only source of information for making predictions, guidance is important in building a set of financial expectations for a company. Examining the trend in historical guidance and how well results matched the reported forecasts can provide a sense of management's understanding of where the company is headed. One can also get a feel for management's conservatism in giving guidance – regardless of whether management tends to "low ball" Wall Street in order to generate positive earnings surprises.

SEC Filings
Every U.S. company must generate four standardized financial reports for public dissemination every year: three quarterly 10-Q reports and one annual 10-K filing. Form 10s elaborate on earnings reports, providing more full disclosures like management's discussion and analysis (MD&A) of financial results. MD&A is a more complete disclosure of business performance during the quarter or year than would commonly be found in an earnings press release. Form 10s also always include a full set of financial statements - unaudited statements for the quarterlies and audited for the annual filing. Audited financials are audited for their adherence to generally accepted accounting principles (GAAP). Unlike earnings announcements, Form 10s are not timely; they always come out at least a few days or weeks after an earnings announcement. Historical Form 10s are the primary source for financial and business information when building a thesis on a new stock. (Keep exploring this subject in How does the NASD differ from the SEC?, What happens to the fines collected by the Securities and Exchange Commission? and Where can I find a company's annual report and its SEC filings?)

Press Releases and Investor Presentations
Companies commonly issue non-earnings-related press releases on business developments throughout the year. These cover anything and everything. Companies must report material business developments to the public as events arise. So every new business contract, acquisition or divestiture, change in management or anything else, is disseminated to the public on an ad hoc basis via press release. (To keep reading on this company actions, see The Basics Of Mergers And Acquisitions and What Are Corporate Actions?)

Press releases are also the avenue through which companies disseminate earnings warnings. When management becomes aware that the company's financial performance for a quarter is not tracking Wall Street's expectations or its guidance, they will disseminate a press release stating this. The idea is to get material information that could affect a stock's price in the market out to the public as soon as possible. Bad financial news is often released well ahead of actual earnings releases.

Many companies include special presentations on the investor relations pages of their websites. These are usually intended to help investors understand the business and management's approach to running it. They can be an important place to start looking at the fundamentals of the business as they often explain key business drivers, industry exposures and non-financial fundamental business drivers. Management often delivers these presentations at institutional investor conferences put on by sell-side firms. These conferences are typically held a few times a year in big cities throughout the country. Institutional investors have to be invited to attend these conferences, requiring ample trading business. Conferences are typically not open to the public, even though investors can usually get a copy of the presentation's slides from the investor relations page. (Find out more about drivers in Forces That Move Stock Prices and What Is The Impact Of Research On Stock Prices?)

The Bottom Line
Equity investors must always remember that the management teams of public companies are the most biased market participants out there. In fact, most company CEOs think their stock is a great investment opportunity. The SEC's disclosure rules help provide unbiased information. Any other color provided by management - like in an investor presentation, face-to-face meeting or interview on television - is bound to put the company in the most optimistic light possible.

Before starting to build an investment thesis on a stock, investors should put their printer to work. Most company analysis files will have at least one 10-K report, several 10-Q reports, a big stack of press releases and hard copies of investor presentations. Once an analyst or investor gets a good base of knowledge from doing this reading he or she can then move on to building a financial model and conducting the financial and business analysis necessary to develop a good investment thesis on a stock.

By Bryn Harman, CFA, Contributor - Investopedia Advisor

Bryn Harman, CFA, is a seasoned investment professional, amassing over 13 years of experience in the fields of corporate finance and investment finance. His focus has been on bottom-up fundamental analysis of small cap companies for over seven years. Bryn is currently the Director of Research for a value-oriented investment firm in the Northwest. Bryn has a Bachelor of Commerce from the University of Saskatchewan, Canada.

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