Securities Analyst

Any investor, even a small one, can do the kind of analysis of his own stocks that two of Wall Street's most sophisticated security analysts do for the nation's major institutional investors. Robert Olstein and Thornton O' glove sell their Quality of Earnings Report for fees running into five figures a year in security transaction commissions.

They don't forecast the market or recommend buys, sells, or holds. They critique the financial statements of hundreds of major corporations, looking for problems. And they find them.

In an interview, Olstein and O'glove disclosed ways that individual investors can examine their own holdings in the same ways-if they'll just take the time.

When they have a question about a company, the first thing they do is call the company for an answer. Individual investors have an advantage over professionals here: Corporate executives are less wary of them, and more likely to answer straight rather than evade or smooth talk. Steps to take:

Inventory figures are crucial: Not only the turnover ratio changes, but also the mix of raw materials, work in progress, finished goods, etc. Look at these figures to see if there are buildups of finished goods, maybe signifying plans to cut production, or an increase in raw materials without increases in work in progress, meaning a production problem.

Accounts receivable

What's happening to allowance for doubtful accounts? Worry if the ratio to receivables is up or down. Could mean they are expecting trouble if it's up or manufacturing false earnings if it's down. Another key number worth figuring can be the number of days of sales in the receivables total, indicating the level of activity compared with previous years.

Accounts payable

  • Are they stretching out payments? Why?
  • Credit problems?
  • What is the company's liquidity situation?
  • Is it going to need new financing?

Sources and uses of funds statement

A sources and uses of funds statement is a summary of a company's financial position changes from one period to the next. It is also known as a statement of changes in financial position or a flow of funds statement. In US audited annual reports, it has been replaced by the cash flow statement (1989).

The cash flow statement depicts a company's cash inflows and outflows over an accounting period, which is usually a quarter or a year. A cash flow statement summarizes a company's changes in cash and cash equivalents by categorizing cash flows as operating, investing, or financing.

Income statement

Look at ratio of marketing costs, R&D costs, cost of goods sold, etc., compared with trends. Is it controlling its expenses at past rates or losing control? Did changes in trends penalize earnings? Increase them? Deviations in either direction are worth following up with calls to management (play the bumpkin; you may get better information).