Pity the poor anonymous souls who were the last people hired by Broadview Networks before it filed for Chapter 11 bankruptcy last August. When you’re done feeling sorry for them, take a lesson away from their experience: Always research a company’s finances before you agree to work there.
If you hate the prospect of diving into a bunch of annual reports and financial releases, remember this: The code-crunching skills of developers and engineers can be tweaked to do a little number-crunching as well.
Once you get a hold of a company’s report, your first stop should be the auditor’s letter. “If the auditor questions whether the firm will continue as a ‘going concern,’ it could mean the company is near bankruptcy,” says Lita Epstein, author of Reading Financial Reports for Dummies. “Working there is not usually a good career choice.”
Indeed. In March 2012 — five months before its Chapter 11 filing — Broadview’s independent auditors issued that very warning in the company’s annual report (also known as a 10-K).
Here’s where to find the auditor’s letter:
- On the menu bar of the Securities and Exchange Commission website (www.sec.gov), click on “Filings,” then “Search for Company Filings.”
- On the resulting page, click on the link that begins, “Company or fund name, ticker symbol…”
- In the first box, enter the company name. Or, you can go to the second box and punch in the ticker symbol.
- You’ll then see a list of the company’s documents. In the “Filing Type” box, type in “10-K” and hit “Search.” Click on the most recent 10-K.
- Once you’ve got the report, search for “Independent Registered Public Accounting Firm” or “Independent Auditors.”
- In the results, find the section called “Report of Independent Registered Public Accounting Firm,” or something along the lines of “Report of (auditing firm’s name), Independent Auditors.” You’ll find the auditor’s letter in those results. If there’s any wording about doubts about the company “continuing as an ongoing concern,” it will usually in the last paragraph.
Code Crunchers into Number Crunchers
Within both the annual and quarterly reports (or 10-Qs), there are four areas that are worth investigating.
- Balance sheet
- Income statement
- Cash flow statement
- Management’s discussion and analysis of financial condition and results of operations
To find these:
- Look in the 10-Q for the most recent financial data, or the 10-K if you want to track a company’s financial performance for more a longer period of time.
- In the 10-Q, these four items are in “Part 1: Financial Information.”
- In Part 2 of the 10-K, you’ll find the three financial statements in “Financial Statements and Supplementary Data.” The management analysis is a separate line item.
A balance sheet shows a snapshot of the company’s assets and how much it owes at a particular point in time. “You can see how much excess cash or debt a company owes,” says Paul Larson, an equity strategist for Morningstar. “Joining a company with a lot of debt is a riskier relationship.”
To figure out where the company stands in this regards, divide the total liabilities by total assets figure to get its “debt ratio.” The higher the ratio, the less attractive the company is.
For example, in most recently reported quarterly results, Zynga lists total liabilities of almost $751.8 million and total assets of $2.6 billion. That gives it a debt ratio of 28.9 percent. Meanwhile, Electronic Arts reported $3 billion in total liabilities and $5.2 billion in total assets, giving it a debt ratio of 58.5 percent.
Of course, you need to put that number in context. To do that, suggests Tom Robinson, managing director of education for the CFA Institute, an organization of financial advisors, compare the debt ratio of your targeted company with others in the same industry.
Job Tips in the Income Statement
The annual report’s income statements break out how much money a company generated over the course of several years, and how much it spent. “You want to look at the revenue line and see if revenues are growing and not declining,” says Robinson. “In the net income area, it will tell you if a company is profitable and whether its profits have been increasing at the same pace or greater than its revenues.”
Take particular note of the income statement’s Research and Development expense line. That will give you an idea of whether the company is investing or scaling back on its R&D. That, in turn, could represent a hiring opportunity or potential layoffs in the works.
To determine the level of R&D investment, divide the R&D expense into total revenue. For example, last year Intel invested 15.5 percent of its revenue into R&D, slightly more than the 15 percent it invested in 2010, but less than the 16 percent in 2009.
The Cash Flow Statement
There are three components to a company’s cash flow statement:
- Operating activities
- Investing activities
- Financing activities
“The key thing to look for is the operating [activities] cash flow, because if it’s a negative number, the company is going to have to continue to borrow to keep the business going,” Robinson points out.
Management’s Crystal Ball
Finally, read through management’s discussion and analysis of the company’s financial condition. “They’ll discuss if profit margins are increasing or decreasing, whether they’re reducing costs, which should be a concern to employees,” Robinson says.
But you can go beyond the annual reports here. Check out is investor relations section of the company’s website, too. Read the company’s quarterly earnings press releases, Larson says, and listen to the webcast of its earnings call with analysts, if it’s posted.
If all this sounds like a lot of work, it is. But since you don’t want to go through the pain of a job search just to find yourself back on the street three months later, we think the effort’s well worth it.
If you’ve got questions about company finances or want to learn more details about any of this, just post a comment below.