Annual reports contain wealth of information

The Motley FoolFebruary 17, 2013 

Do annual reports indicate how overvalued or undervalued a company’s stock is? – R.N., Jacksonville, Fla.

Not usually, but you’d do well to read your holdings’ annual reports anyway. If you’re a novice, at least read the CEO’s letter to shareholders, which offers a sense of management character and the company’s strategic plan. The financial statements can be even more informative. The balance sheet will show you the firm’s financial health at one point in time, including its cash, money it owes, money owed to it, etc. The income statement (sometimes called the statement of operations) shows sales, costs and profits over a period of time, while the statement of cash flows will list all of the company’s cash inflows and outflows during the period.

The more familiar you become with financial statements (perhaps just by reviewing many of them), the better chance your portfolio will have of performing well.

Annual reports don’t focus on companies’ valuations, though. For that, you can look up a company’s current market value easily via online stock quotes. Just click over to a site such as finance.yahoo.com, type in a company’s name or ticker symbol, and look for “market capitalization” (or “market cap”). You can also calculate it yourself by multiplying the current stock price by the number of shares outstanding.

A company’s intrinsic, or fair, value is a more elusive beast. Different analysts will come up with different numbers using different assumptions about the firm’s growth prospects, among other things.

FOOLISH TRIVIA

Tracing my roots back to 1948, at a baby furniture store in Washington, D.C., I’m now a top global toy and children’s products retailer. Based in New Jersey, I boast more than 1,500 stores in the U.S. and around the world. I also encompass the FAO Schwarz brand and sell toys through its Fifth Avenue store in New York City. My Times Square store has a 60-foot Ferris wheel. I employ about 70,000 people, and though I was a publicly traded company between 1978 and 2005, I’m now privately held. Some parents and teachers have taken issue with my name. Who am I?

Last Week’s Trivia Answer: Founded in 1922 and based in Bloomington, Ill., I insure more homes and cars than any other company in the United States, and I’m a top insurer in Canada, too. I was recently ranked in the top 50 of the Fortune 500. You can’t buy stock in me because I’m a mutual company, owned by my policyholders. Who am I? Answer: State Farm

THE MOTLEY FOOL TAKE

Think Corning and you might think glass, but there’s much more to this high-tech giant. It’s in the business of specialty glasses and ceramics, supplying fiber-optic networks, LCD television makers and more.

Corning keeps innovating. Its robust Gorilla Glass is now found on millions of mobile phones and tablets, and it has recently introduced Willow Glass, which is thin and flexible. Gorilla Glass is present on more than 1 billion devices from more than 33 brands. The latest version of it is reportedly 50 percent stronger than the last version, and will hide some 40 percent of scratches from the naked eye.

All is not rosy at Corning right now, though, with profit margins shrinking recently and debt inching up (though its cash is plentiful). But sales of televisions are expected to pick up in 2013, and mobile devices are proliferating rapidly. Corning’s future is likely to be brighter than its present.

Analysts expect the company to grow by about 12 percent annually over the next five years, so with its recent price-to-earnings (P/E) ratio of 10 and its forward P/E near 8, Corning’s stock seems rather attractively valued. It even offers a dividend, recently yielding 3 percent. (The Motley Fool owns shares of Corning and its newsletters have recommended it.)

Reach the Gardners at fool@fool.com, or Motley Fool, 1130 Walnut, Kansas City, MO 64106.

The News Tribune is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service