Disclosure Checklist for Companies
The following is a checklist of Disclosure items for companies. All of these items are things that will help investors to analyse and understand the company. Those companies that respect individual shareholders tend to provide most of these items.
It is assumed that all companies provide at least the minimum level of disclosure that is required by law and GAAP. For very small companies that may be acceptable. However, larger companies that respect their shareholders will go well beyond that level and provide supplemental disclosure including the following. Unfortunately, few such companies exist.
| INCOME STATEMENT DISCLOSURE | ||
|---|---|---|
| Current Outlook and progress | When reporting earnings a company should always comment on the how the current quarter, already underway, is proceeding. Whenever sales or profits are tracking higher or lower than expected, a company should issue a press release. This will insure that all investors become aware at the same time. | |
| Average Shares Outstanding | ü | Many companies neglect to provide the average number of shares in the period. This is particularly true for quarterly reports. |
| Diluted Shares Outstanding | ü | Average diluted shares should be provided in all quarterly and annual reports. |
| Net Income to Common | ü | A few companies with preferred share dividends fail to deduct preferred dividends to show the net income applicable to common shares |
| Adjusted net income | The net income adjusted for unusual gains losses, amortization of goodwill and other unusual or non-recurring items, net of income tax impacts, should be provided. Usually the adjusted net income is a more representative figure than the unadjusted net income. | |
| Unrealized gains on investments | ü | If a company has an investment in shares of another company that is carried at the lower of book or market value, the company should discuss and disclose any unrealized gains on those shares. In a few cases such unrealized gains can be very substantial. |
| Dividend | ü | The dividend per share should be mentioned in every quarterly or annual report. |
| CASH FLOW STATEMENT | ||
| Cash Flow | ü | Show a subtotal of the cash flow from operations, before changes in working capital amounts. (Effectively this is the cash flow from operations before changes in net short term non-interest bearing investments in inventories, accounts receivable less cash owed to suppliers). Only a few companies fail to do this. |
| ü | ||
| Free Cash Flow | Cash flow is net income plus depreciation plus other non cash gains and losses. The Cash Flow is available for re-investment in the business, paying down debt, or paying dividends. Free Cash Flow is Cash Flow minus capital investments that are needed to sustain the business at its current level. For example a large Cash Flow that results from a large depreciation expense is not of much use if all of the Cash Flow has to be spent to replace the depreciated and deteriorated equipment, just to stay in business. Free cash flow is a better measure of the net cash available for investment to expand the business, pay down debt or pay dividends. Free Cash Flow should be reported and discussed. Almost no companies do this. | |
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| Maintenance Capital Spending | Related to free cash flow, it is essential that companies separate capital spending into two categories: 1. maintenance spending to replace worn out assets, 2. new spending to accommodate growth. Very few companies provide this essential break-out. | |
| Dividends | ü | Dividends on preferred shares should always be shown separate from dividends on common shares |
| ANNUAL REPORT | ||
| Summary of Quarterly Reports in the Annual Report | ü | The annual report should always provide a summary of the quarterly reports. This should include a figure for adjusted net income. |
| Historical summary | ü | As an analyst I find that this is the area that companies most often fail to provide enough basic information. The summary should be for at least the last six years. Companies often fail to provide the average number of shares outstanding (both basic and diluted) each year. Also they usually fail to provide the adjusted earnings. If the company believes that adjusted earnings are the most representative, then it is essential and logical that these be provided in the historical summary. |
| Competitive Landscape | ü | Companies should always discuss the major industry(s) that they compete in and disclose their market share and who the major competitors are. The outlook for the industry in terms of both growth and profitability should be discussed. companies should indicate what their competitive advantage (if any) is. |
| Segmented Earnings | ü | Where segmented revenues and earnings are provided, the assets and ideally the equity in each segment should be provided. |
| Schedule of Fixed Assets | Companies should provide a summary of their major fixed assets. Where real estate or other marketable assets are involved, the summary should indicate the original cost of the assets, the depreciation, the additional investment in the assets, the age of the assets, the current market value and the property tax assessment value. | |
| LIQUIDITY AND FINANCIAL STRENGTH | ||
| Bond Rating | Only a few companies provide their bond ratings. The Bond Rating is an important independent assessment of the credit worthiness and financial strength of the organization. It should be disclosed. | |
| STOCK OPTION COMPENSATION | ||
| Stock Option Value | ü | When disclosing the number of options issued to executives in the annual meeting proxy circular, companies should include the estimated value of the options calculated in accordance with the black-scholes formula. I understand that some U.S companies are required to disclose this. It is only logical that the value of the options be disclosed so that investors can make some judgment regarding the salary level. I no of no Canadian company which is voluntarily providing this vital information. |
| INSIDER TRADING | ||
| Insider Trading | ü | Companies should make a much greater effort to distribute insider trading reports by posting them to their Web Sites or as periodic press releases. I know of no company that does this. |
| OUTLOOK | ||
| Next year’s earnings | ü | Companies should provide, each quarter, an estimate of net and adjusted earnings per share for the next rolling 4 quarters. Companies are in a much better position to forecast their earnings than are analysts (who in most cases are probably fed the estimate by management in any event). |
| Long range earnings growth | ü | The company should forecast its earnings growth for the next 5 or 10 years and discuss, at a high level, how it will be achieved. |