How to Research an Employers Financial Health

By Dawn Kawamoto | Jan 10, 2013

Posted In Looking in Tech
Tags: Hiring, Job Hunting, Job Skills
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Pity the poor anonymous souls who were the last people hired by Broadview Networks
before it filed for Chapter 11 bankruptcy last August. When youre done feeling sorry for
them, take a lesson away from their experience: Always research a companys finances
before you agree to work there.
If you hate the prospect of diving into a
bunch of annual reports and financial releases, remember this: The code-crunching
skills of developers and engineers can be tweaked to do a little number-crunching as
well.
Start Here
Once you get a hold of a companys report, your first stop should be the auditors letter.
If the auditor questions whether the firm will continue as a going concern, it could
mean the company is near bankruptcy, says Lita Epstein, author of Reading Financial
Reports for Dummies. Working there is not usually a good career choice.
Indeed. In March 2012 five months before its Chapter 11 filing Broadviews
independent auditors issued that very warning in the companys annual report (also
known as a 10-K).
Heres where to find the auditors letter:
On the menu bar of the Securities and Exchange Commission website
(www.sec.gov), click on Filings, then Search for Company Filings.
On the resulting page, click on the link that begins, Company or fund name,
ticker symbol
In the first box, enter the company name. Or, you can go to the second box and
punch in the ticker symbol.
Youll then see a list of the companys documents. In the Filing Type box, type
in 10-K and hit Search. Click on the most recent 10-K.
Once youve got the report, search for Independent Registered Public
Accounting Firm or Independent Auditors.
In the results, find the section called Report of Independent Registered Public
Accounting Firm, or something along the lines of Report of (auditing firms
name), Independent Auditors. Youll find the auditors letter in those results. If
theres any wording about doubts about the company continuing as an ongoing
concern, it will usually in the last paragraph.
Code Crunchers into Number Crunchers
Within both the annual and quarterly reports (or 10-Qs), there are four areas that are
worth investigating.
Balance sheet
Income statement
Cash flow statement
Managements discussion and analysis of financial condition and results of
operations
To find these:
Look in the 10-Q for the most recent financial data, or the 10-K if you want to
track a companys financial performance for more a longer period of time.
In the 10-Q, these four items are in Part 1: Financial Information.
In Part 2 of the 10-K, youll find the three financial statements in Financial
Statements and Supplementary Data. The management analysis is a separate
line item.
Balancing Act
A balance sheet shows a snapshot of the companys assets and how much it owes at a
particular point in time. You can see how much excess cash or debt a company owes,
says Paul Larson, an equity strategist for Morningstar. Joining a company with a lot of
debt is a riskier relationship.
To figure out where the company stands in this regards, divide the total liabilities by total
assets figure to get its debt ratio. The higher the ratio, the less attractive the company
is.
For example, in most recently reported quarterly results, Zynga lists total liabilities of
almost $751.8 million and total assets of $2.6 billion. That gives it a debt ratio of 28.9
percent. Meanwhile, Electronic Arts reported $3 billion in total liabilities and $5.2 billion
in total assets, giving it a debt ratio of 58.5 percent.
Of course, you need to put that number in context. To do that, suggests Tom Robinson,
managing director of education for the CFA Institute, an organization of financial
advisors, compare the debt ratio of your targeted company with others in the same
industry.
Job Tips in the Income Statement
The annual reports income statements break out how much money a company
generated over the course of several years, and how much it spent. You want to look at
the revenue line and see if revenues are growing and not declining, says Robinson. In
the net income area, it will tell you if a company is profitable and whether its profits have
been increasing at the same pace or greater than its revenues.
Take particular note of the income statements Research and Development expense
line. That will give you an idea of whether the company is investing or scaling back on
its R&D. That, in turn, could represent a hiring opportunity or potential layoffs in the
works.
To determine the level of R&D investment, divide the R&D expense into total revenue.
For example, last year Intel invested 15.5 percent of its revenue into R&D, slightly more
than the 15 percent it invested in 2010, but less than the 16 percent in 2009.
The Cash Flow Statement
There are three components to a companys cash flow statement:
Operating activities
Investing activities
Financing activities
The key thing to look for is the operating [activities] cash flow, because if its a negative
number, the company is going to have to continue to borrow to keep the business
going, Robinson points out.
Managements Crystal Ball
Finally, read through managements discussion and analysis of the companys financial
condition. Theyll discuss if profit margins are increasing or decreasing, whether theyre
reducing costs, which should be a concern to employees, Robinson says.
But you can go beyond the annual reports here. Check out is investor relations section
of the companys website, too. Read the companys quarterly earnings press releases,
Larson says, and listen to the webcast of its earnings call with analysts, if its posted.
If all this sounds like a lot of work, it is. But since you dont want to go through the pain
of a job search just to find yourself back on the street three months later, we think the
efforts well worth it.
If youve got questions about company finances or want to learn more details
about any of this, just post a comment below.
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