Q: How should I go about reviewing a company’s financial statements to assess its attractiveness?
On the balance sheet, if inventory levels or accounts receivable are growing faster than sales, that’s a worrisome sign. So is a rising debt level, especially with high interest rates.
Examine the statement of cash flows to see how cash is being generated. Generally, you want to see most cash coming from ongoing operations — products or services sold — and not from the issuance of debt or stock or the sale of property. Positive and growing free cash flow is good, too.
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Review the company’s profit margins (gross, operating and net). Robust margins can be a sign of a higher-quality company, suggesting that it has a proprietary brand or technology it can charge more for.
Check the numbers for previous years, too, to see whether the trends are positive.
Learn more in “Reading Financial Reports for Dummies” by Lita Epstein (For Dummies, $22).
Dear Fool: Long ago, I bought 200 shares of Intel at $25 apiece, on the advice of a broker. Not too long later, the stock hit $40 and the broker wanted me to sell, which I did not want to do. However, he persisted and I finally gave in. That’s when I learned that some brokers are more interested in commissions than the client’s wishes. (He is no longer my broker.)
The Fool responds:
While investment advisers and broker-dealers often perform similar services, they’re generally not bound by the same set of rules.
Investment advisers usually have a “fiduciary” duty to put their clients’ interests first, while broker-dealers do not. Our friends at the Securities and Exchange Commission (SEC) are considering making the rules more uniform, by requiring more of brokers.
Your story shows how valuable it can be to make our own investing decisions. If, when Intel hit $40, you knew the detailed reasons why you’d invested in it and you didn’t think they had changed, you might not have sold.
Retail real estate
If you’re interested in retail and real estate, consider Retail Opportunity Investments Corp. (Nasdaq: ROIC) as a possible investment, as it combines both.
It’s a real-estate investment trust (REIT), which is a special kind of company that has to pay out at least 90 percent of its taxable income in the form of dividends. The company is boring, but also kind of exciting.
The underappreciated company invests in necessity-based shopping centers — think grocers, banks and pharmacies — in space-constrained markets with above-average incomes.
Thus, it focuses on stable, cash-producing properties, buying solid shopping centers, which, given a little TLC, could do a lot better.
By buying properties on the cheap in down markets, it can sell or re-lease them at higher rates as markets turn up.
Some speculate the company might be bought by a bigger fish at a premium price.
It might also keep getting bigger on its own,
and seeing its value rise. The stock recently offered a 4.4 percent dividend yield, as well.