Ask the Fool
What to learn before investing
Q: What are some basic things to look for in the financial statements of a company I might invest in? – B.W., Opelika, Ala.
A: The more you learn about a company, the more confidence you can have in your assessment of it and your ultimate investment decision. Reviewing and crunching numbers from its financial statements is smart.
On the balance sheet, if inventory levels or accounts receivable are growing faster than sales, that’s a worrisome sign. So is a rising debt level. Examine the statement of cash flows to see how cash is being generated. Generally, you want to see most cash coming from ongoing operations – products or services sold – and not from the issuance of debt or stock or the sale of property. Positive and growing free cash flow is good, too.
Review the company’s profit margins (gross, operating and net). Robust margins can be a sign of a higher-quality company, reflecting proprietary brands or technology it can charge more for.
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You might examine return on equity and return on assets, too, comparing the company with its competitors. Check previous years’ numbers, too, to see whether the trends are positive.
Name that company
I trace my roots back to 1953 and the Rocket Chemical Co., which tried several dozen times to make rust-prevention solvents and degreasers for the aerospace industry. They eventually had a water-displacing winner, which remains my flagship product. It was used by soldiers in Vietnam to prevent moisture damage in firearms, and by 1993, it was in 4 out of 5 American households. It’s now used by businesses and consumers for thousands of purposes – even to remove a naked burglar trapped in an air conditioning vent. My other brands include 2000 Flushes, Lava and Carpet Fresh. Who am I?
Last week’s trivia answer: Gannett
Death of mallshurting VF Corp.
The North Face jackets. Timberland boots. Vans shoes. What do all of these have in common? They are all products owned by VF Corp. (NYSE: VFC), and combined with other outdoor and action products, they brought in more than $7.5 billion in sales last year.
Impressively, VF Corp.’s stock has posted average annual gains in the double-digits over the past five, 10 and 15 years. And yet, over the past two years, the stock has fallen by double-digits – presenting a unique opportunity for long-term investors: the chance to buy a safe and growing dividend that recently yielded 2.8 percent.
What’s to blame for the drop? The death of malls. As e-commerce gobbles up more and more of the retail pie, companies selling products via malls have suffered. The silver lining is that VF Corp.’s weakness comes from sales channels. Thus, VF needs to transform its business, building new sales channels. It has already been doing that: The company’s direct-to-consumer, or DTC, channel includes both VF-operated stores and e-commerce, and it has been growing steadily.