Guide To Financial Statements: Read The MD&A

You can find a narrative explanation of a company’s financial performance in a section of the quarterly or annual report entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” MD&A is management’s opportunity to provide investors with its view of the financial performance and condition of the company. It’s management’s opportunity to tell investors what the financial statements show and do not show, as well as important trends and risks that have shaped the past or are reasonably likely to shape the company’s stock future.

The SEC’s rules governing MD&A require disclosure about trends, events or uncertainties known to management that would have a material impact on reported financial information. The purpose of MD&A is to provide investors with information that the company’s management believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It is intended to help investors to see the company through the eyes of management. It is also intended to provide context for the financial statements and information about the company’s earnings and cash flows.

HOW ARE GROWTH STOCKS IDENTIFIED

In the financial stock market growth stocks are defined as those stocks which grow in value and capitulate a high return on equity (ROE). ROE is calculated by dividing the company’s net income by the company’s equity. For the stock to be categorized as a growth stock, there must at least be 15% return on equity. This means that their earnings should grow at an above average rate in comparison to the stock market.

Growth stocks are also known as glamour stocks. The reason behind this is, growth stocks do not generally yield a dividend. The respective company rather prefers to reinvest its retained earnings in other capital projects. This income is preferred to be used to finance further expansion. In todays finance stock market, majority of the technology companies are growth stocks. One point must be noted here. A growth company’s stock is not necessarily a growth stock. It is often found that this growth company’s stock is over valued. 

Some common characteristics of Growth Stocks are:

• They have a strong growth rate – the growth rate should be both predictable and historic. Well, you would normally like to find the smaller companies with a 10% growth rate and the larger companies with 5 to 7% for a period of the last five years. Then you would like the same rate to continue or have projected growth rate.
• It should have a strong REO – the company’s return on equity (REO) must have a healthy comparison with the industry and the five tear average as well.
• It must have good earnings per share (EPS) – take a look at the pre-tax profit margin. The company must be able to translate sales to earnings. The management must control costs. And the pre-tax margin must exceed the latest five-year average along with the industry average.
• The projected stock price must be positive. The projections of the stock analysts are important here. They make these projections based on the business model and stock market report  position of the company.

The most important attribute has got to be its consistency of maintaining its average growth in revenue and earnings.

Investors also look for reward stock growth. This means that the growth stock should have a mounting price over time. In a day-to-day market the position of the stocks are highly volatile. But the long term investors are not concerned with this volatility but consistent movement is closely studied through.

The trade ahead of averages – The stock must trade ahead of its 50-day price moving average. Though this gauge may not be the most reliable but it certainly gives a clear idea of the stock’s performance.

The Short Term Growth – For those investors whose expectations are for more short term growth, the 50-day moving average is quite helpful. The moving average is one consideration and a consistent trading at or above the 50-day moving average is a different consideration.