This article, by Parmelee Eastman, Job-Hunt's Research Pro,
is from the Nov. 12, 2004 issue of Job-Hunt's free twice-a-month
e-mailed newsletter, the Online
Job Search Guide. For more articles in this series, go to
the Company
Research Pro page on www.job-hunt.org.
This article focuses on public companies that are required
by the U.S. Securities and Exchange Commission to publish quarterly
and annual financial statements including the income statement,
segment and/or geographic breakdown, balance sheet, cash flow,
and notes on accounting practices. Researching private companies
and non-profit entities will be examined later in this series.
What Can You Learn?
Analyzing the recent financial picture helps you understand
why the firm might hire you and what the goals and environment
of the firm might be. While the past financial performance does
not guarantee the future, the insight does help predict it.
Why Are They Hiring?
Is the job you want a replacement person for an essential job?
A revenue-generating sales position (which might be very pressured)?
How likely is the company to be able to provide you with advancement
possibilities and pay raises, or even stay in business? The company's
profitability picture can give you insight into what may be happening
and why.
What's the Trend?
Let’s look at the company's annual report, audited financial
information required of all U.S. "C" corporations by
the SEC, often available on company Websites or at libraries.
The income statement shows the revenue received by the company
for the most recent year, the prior one to four years, and the
previous eight+ quarters. What is the trend in revenue? Essentially
flat, steadily rising, erratic, or down? And what does the Management
Discussion reveal about the reasons for changes in revenue? While
the firm is barred from projecting the future in its financial
reports, you can gain a sense of the stability of revenue from
the five year trend.
Larger entities separate revenue and profit by business segment
and possibly by geography (generally too high level to be useful).
You can see how important your area of interest is to the firm
overall.
Choosing Your Part of the Company
Hewlett Packard’s 2003 annual report showed the results
for its five segments. Which divisions would you like to join?
And which would you avoid?
| |
Revenue |
Earnings (loss)
from Operations |
| Imaging and Printing Group |
$22,623 |
$3,570 |
| Personal Systems Group |
21,228 |
19 |
| Enterprise Systems Group |
15,379 |
(54) |
| HP Services |
12,305 |
1,372 |
| Financing |
1,921 |
79 |
| Corporate Investments |
345 |
(161) |
Is the Company Profitable?
Profits or net income for the company are what's left after
taxes and special charges are deducted from total or gross income.
Are profits non-existent, flat, steadily rising, erratic, or
down? Why? If the company has a poor record of profitability,
why is it hiring?
Special or one-time charges or additions for plant closings,
increases or decreases from reserves, or revenue from the sale
of divisions can distort the trends. However, ask yourself if
the charges are unlikely to re-occur or are they symptoms of
executive failings.
Assets, Liabilities, and Cash (a.k.a. "Salary Continuation")
The balance sheet contains the company’s assets, liabilities
and debts, and equity. How much cash and assets such as accounts
receivable that will turn into cash quickly does it hold in comparison
to its short-term liabilities (this is called liquidity)? What
are amounts of debt and equity or shareholder value? If the debt
is high or the equity low, how stable is this firm? In general,
short-term (less than one year) assets should match short-term
liabilities and long-term assets should match long-term liabilities.
If the company built a manufacturing facility with short-term
loans from a bank, watch out!
Cash flow statements show the sources of cash such as profits,
loans, equity investments, and how the cash is spent on items
including inventory increases, debt reductions, or stock re-purchases.
Accounting rules require that revenue be recognized or included
when the products or services are delivered. For example, a company
cannot include both years of a two year contract when the contract
is first awarded. And financing such as loans are not included
in the income statement—the interest paid is included.
Cash flow statements focus on cash in and cash out irregardless
of the reporting under accounting rules. Look at the cash flow
statement to see how the organization obtains enough money to
pay its obligations. Negative cash flows do not always indicate
a problem. For instance, fast-growing entities often consume
more cash than they generate internally and have to use outside
financing.
Financial analysts use ratios to compare companies in the same
industry. The "current ratio" shows the amount of liquid
assets to short-term debt. "Debt to equity" ratio indicates
how risky the company’s financing structure is. Calculating
the firm’s ratios and comparing them to industry averages
can indicate variations that should be investigated. Again, differences
do not necessarily indicate a problem; the firm’s financial
strategy or history may have resulted in non-standard ratios.
Reading the notes to the financial statements can clarify some
of the rules and reasons for classifications of items.
A Word of Caution
No single financial figure or ratio stands alone. Insight into
the financial health of the company comes from analyzing the
pieces together to discover the true standing of the company.
And the financials fit into a larger picture of the company and
its future direction.
Job-Hunt's Research Pro: Parmelee Eastman
is president of EastSight
Consulting which helps provide more effective utilization
of external information in internal decision-making processes.
EastSight Consulting clients range from start-ups to Fortune
500 companies. Prior to founding EastSight, Parmelee was the
vice president of the global technology and communications practice
at Fuld & Company and employed for 16 years at Digital Equipment
Corporation. Parmelee holds a B.A. from Wellesley College and
an M.B.A. from the Harvard Business School. She can be reached
at peastman@eastsightconsulting.com.
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