Reading the footnotes



HOW reliable are the financial postings of listed companies? The question begs for an answer from the Securities and Exchange Commission (SEC) in view of the numbers these filings contain and which are intended to inform public investors about the financial health of a listed company.

As a wakeup call for SEC officials, Due Diligencer is only encouraging the public to be more vigilant. The SEC may be tasked to review all financial filings each quarter and ask if the entries are reliable. Still, the public investors will decide which stocks to choose.

If it is possible, even the Philippine Stock Exchange (PSE) may want to get involved in going over financial disclosures not for possible errors but for doubtful entries. Due Diligencer recently questioned the use of “others” as an entry under expenses. This time, it is up to the regulatory authorities to ask how a company happened to have incurred expenses that sometimes approximate revenues.

Getting involved
Public investors should not be used to simply welcome the good news and hate the bad news. For a change, they should also ask questions like how their stocks reported only so much net profit. In other words, they should also become active investors. Don’t assume that listed companies have disclosed everything that can be disclosed by being fully satisfied with the financial performance of any of the listed companies. What the SEC and the PSE could not deliver or have failed to deliver could be a big burden to the public investors. In this case, be wary of the sins of omission of regulatory authorities such as the monitoring teams of the SEC and PSE.

A financial filing, especially one that comes every quarter, is not all about net income. It is not all about retained earnings, an entry under equity which, in turn, represents a company’s accumulated net profits. It is not all about current assets and current liabilities, etc.

In short, it is time for the public investors to read ALL disclosures that are posted on the PSE website. As for the quarterly financials and annual reports, the public investors may also want to include the footnotes in reading financial postings.

Reading the footnotes
Footnotes explain certain accounting entries because not everything can be accommodated in a disclosure. For this reason, the public investors should include footnotes in their daily reading habits.

Public investors, for instance, may have placed their money on listed shares in Metro Retail Stores Group Inc., which reported “net sales” under “revenue.” Why net sales? There should be more to “net sales.”

To better understand the use of “net sales,” the public investors could ask Metro Retail what the numbers were before net sales. If not, they would have to read the filings of Robinsons Retail Holding Inc., which also reports not net sales but “sales” with qualification such as “net of sale discounts and returns.” Robinsons also directs the readers of its financial disclosures to “Notes 6, 21, and 25.”

The public investors should also treat the annual reports like they are quarterly financials. They will find the yearly filings to be more comprehensive. They will find the list of stockholders with the audited annual financial reports as an attachment—a very important attachment.

Careful reading
A few words of caution: Whenever you read financial disclosures, don’t fully rely on them in making an investment decision. The numbers in quarterly disclosures may change by the end of the year. Even the audited financial reports are also subject to adjustments in succeeding annual reports. (Due Diligencer has yet to research why and how these changes occur.)

Financial filings, whether annual or quarterly, are as important as the other disclosures. Make no mistake about any of them – treat every disclosure as important as the other. All postings are very significant influencing factors when you make investment decisions.

Finally, listed stocks may earn you more than what you make from your bank deposits. They pose risks to your wealth too as you choose the best company with the best executives. More importantly, when your stock investments earn, you end up only with paper wealth unless you liquidate your holdings.

By the way, there are also big losers among market investors.


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