SOURCE:  USA Today Features Parish & Company

PORTLAND, Ore., February 23, 2004  --USA Today Features Bill Parish of Parish & Company in Story Regarding How to Read a Financial Statement

USA Today - February 22, 2004
by Matt Krantz

Decoder ring not required, but hints help

You'd better warn your mail carrier now. Thick packets containing annual reports put out by companies you're invested in are about to start landing in your mailbox with a thud.

Some, like Starbucks', are filled with pretty pictures and look great on a coffee table. Others, like Warren Buffett's Berkshire Hathaway, are stripped of anything with color and instead filled with pages of informative text.

But they all have something in common, if you know how to read them (and the 10-K filings that usually accompany them), these documents provide one of the most probing looks at the companies in which you own shares.

Uncovering their precious nuggets, though, is becoming more difficult and time-consuming as companies scramble to comply with reams of new laws. The average 10-K -- the version of the annual report required by regulators -- last year had 171 pages, up 76% from just five years ago, Credit Suisse First Boston says.

To help you unearth the important details in these reports, USA TODAY's Matt Krantz tapped a variety of financial wizards for tips on how they read these sometimes daunting documents.

Quotes from Parish & Company Include the Following:

Compare the latest year with past years.

One of the biggest advantages of the annual report and the 10-K: They allow you to compare the company's performance to those of prior years.

In fact, when Bill Parish, investment advisor at Parish & Co., gets a 10-K, he heads straight for the Selected Financial Data section.  Here, the company must state how all its key measures, ranging from revenue to net income and assets, have changed over the prior five years.

And this section is very telling about Microsoft.  It shows that the company's pile of cash jumped 185% to $49 billion over the past five years, even though revenue grew just 63% during the same period.  This shows how the company has morphed from a growth phase to a more established one and isn't investing as heavily in research and development of new products.

"The defining characteristic of Microsoft is that the fastest growing thing they have is cash," Parish says, adding that these numbers show how the company has reached a maturation point. "The question is why?"

Read the auditor's opinion

One thing that makes the 10-K so vital is that it's the only financial document that's actually signed off on by auditors.  It's one of the few times where auditors can warn investors of potential trouble.

Usually at the back of the report, the auditor's get a page to give their thoughts.  It's not as if they will put in big block letters, "don't invest in this company!"  They have more subtle ways to issue such warnings.

One thing you'll want to watch out for is when an auditor writes that their opinion on the company is "qualified."  This means the auditor has reservations about the way the company is keeping its books, and will then explain why.

Another thing you want to watch for is the rare occurrence that the auditor says is questions whether the company can be a "going concern."  That's about as far from a vote of confidence as a company can get.

Parish also suggests looking for the words "subject to."  That could mean the auditor has some real fears about some part of the business.