Analyze The Annual Report

Let's go over it again. It's important. Get copies of the company's annual
report. Investment firms on Wall Street are experts at reading between
the lines of the annual report. These reports are highly polished to gloss
over any company rough spots. Reports try to present a pretty picture.

You can contact the company directly to get a copy of the annual report.
Always request the last two or three issues. Compare their goals from the
previous year against the actual performance for the following year. Two
sections of the annual report require special attention.

Go directly to the chief executive's report and the consolidated balance
sheets. The CEO addresses the company's performance and intentions.
The balance sheets spell out exactly how close to achieving all those
intentions the company may actually be.

Balance sheets reveal the company's assets and liabilities. The total
assets divided by liabilities gives the "current ratio," a benchmark used by
many analysts for determining the financial health of a company. A ratio
of 1.5 to 1, or 2 to 1, is generally regarded as acceptable.

A lower ratio is a warning sign that the company's debts could sink it, or
that it is seriously under funded. Look for entries in the income column
which read "extraordinary" and "non-recurring" gains. This might indicate
assets are being sold to cover losses.

The next thing to check is the income statement. If sales have been flat
while profits have risen it might indicate emergency asset stripping. You
should always check the footnotes. The SEC requires that companies
spell out how the accounts have been prepared.

They do this because some corporations inflate earnings by including
sales even though the money has not been received. This is made clear
in a small-print footnote. Finally, look at the auditor's statement. Usually
it's brief, unless it contains disclaimers, which should set off warning bells.

You can obtain annual 10K and quarterly 10Q reports directly from the
SEC. The fastest way to do this is to get on your computer and go to the
SEC site. It's ... ( http://www.sec.gov ). You'll find background information
on all the key players in the company.