Appendix C: Finance Facts
Links for Chapter 9—Following the Money: Seeing the Business Angle in Any Story
The Bank of Canada
Bank of Canada backgrounder on monetary policy
SEC information on filing 8-Ks
Ontario Securities Exchange Commission on filing material change reports
Ontario Securities Exchange Commission explanation of Publication of Material Change report
Filing Guide (Toronto Stock Exchange)
SEC rules for filing 10-Ks
The System for Electronic Document Analysis and Retrieval (SEDAR)
Annual reports and AIFs (Annual Information Forms)—The BC Securities Commission
Health Canada's Diane-35 reviews
Diane-35 stories based on those review
The health minister's testimony before the Standing Committee on Health
Glossary of Key Financial Reporting Terms
analyst someone (usually employed by an institution such as a brokerage house) who analyzes the markets and certain companies in order to advise on whether they are good bets for investors.
Antitrust laws they are designed to ensure competition by ensuring companies don't become too big. The Competition Bureau is the watchdog that enforces the law through the Competition Act. For instance, the bureau stepped in when Loblaw Companies Limited bought Shoppers Drug Mart Corporation (Shoppers) to force Loblaw to sign an agreement that would see it sell 18 retail stores and nine pharmacies.
assets anything of value that a company, estate, or an individual owns. Capital assets are permanent fixtures such as buildings. Current assets can be converted into cash within 12 months. Intangible assets are non-material such as patents.
balance sheet the financial statement that shows the company's assets and liabilities at a set point in time, usually at the end of a quarter. It is important to remember that a balance sheet is a snapshot of the company's financial condition at a point in time.
bankrupt a person or corporation who has made a voluntary assignment in bankruptcy or against whom a receiving order has been made.1
bankruptcy the state of being bankrupt or the fact of becoming bankrupt.2
bear market what happens to stocks when their prices fall. Conrad C. Fink in his book Bottom Line Writing has a handy description that should make it easier for journalists to remember this term. "Remember," writes Fink, "a bear hugs you and drags you down; a bull hooks you with his horns and throws you up—thus "bull market.")3
bull market what happens when stock prices rise.
board of directors the people elected by the shareholders to review the company's strategy and operations. Reporters should not assume that boards are always looking out for the best interests of the company's investors.
book value (also shareholders' equity) the amount of money a shareholder would receive if the company was suddenly forced out of business, sold everything, and paid its investors the money.4
bottom line how much the company made after paying taxes. Bottom line is also called "net profit," "earnings," or "net profit from continuing operations." It is important to point out the different terminology because the names vary from financial statement to financial statement.
bond a certificate of debt that is issued by a government or corporation in order to raise money, with a promise to pay the holder a specified sum (the principal plus interest) at a fixed time in the future, usually a year. The main types are corporate bonds, municipal bonds, Treasury bonds, Treasury notes, Treasury bills (T-bills), and zero-coupon bonds.5
broker an individual or firm that acts as an intermediary between a buyer and seller, usually charging a commission. For securities and most other products, a licence is required in order to broker deals.6
cash flow the amount of cash the business is able to generate at any point in time. If a company's cash flow is strong, it has money to spend or give back to investors, which is a good indication that things are going well. As we saw in the business chapter, Blackberry is struggling to make money, but the company still has lots of cash on hand.
chief executive officer (CEO) the person in charge of the company, and the conduit between the board of directors and the company. They are usually the highest paid individuals whose salaries usually make news when the proxy circulars containing their earnings are released.
chief financial officer (CFO) the executive in charge of the company's finances. They, too, make high salaries that can also be found on the proxy circulars.
commodity a physical substance such as a good, grain, or metal that may be traded for cash or another substance.
cost of goods sold how much it costs the company to produce the item such as the price of raw materials. If a company's cost of doing business increases significantly, you might want to ask for an explanation, which could then lead to a story.
credit in one sense, credit is just another word for debt. Credit is given to customers when they are allowed to make a purchase with the promise to pay later, as with a consumer credit card. A bank gives credit when it lends money.7
creditor one to whom a debt is owed; in insolvency matters, a creditor is an individual having a claim provable under the Bankruptcy and Insolvency Act.8
current assets a balance sheet item that equals the sum of cash (and cash equivalents), accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these can easily be liquidated if the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.9
current debt a balance sheet item that indicates the total of what the company owes and must pay within a year. In order to determine the company's real financial health, the reporter should compare the current debt to the current assets. The company is in trouble if it owes more money than it has to spend.
debtor one who owes money to another.10
deficit financing this is when an institution such as a government deliberately goes into debt in order to generate business of stimulate the economy during tough economic times such as a recession. After the 2008 recession, the federal government's deficit financing on construction projects to repair aging roads and bridges in cities and towns created a $5.75 billion deficit, compared to a $9.5 billion surplus from the year before.
depreciation the allocation of the cost of an asset over a period of time for accounting and tax purposes, or a decline in the value of a property due to general wear and tear or obsolescence.11 An easy way to think about depreciation is to consider what happens to the value of that car you just bought as soon as you drive it off the lot.
equity the difference between what a property is worth and what the owner owes against that property (e.g., the difference between the house value and the remaining mortgage or loan payments on a house).12 On a balance sheet, the company's equity plus its liabilities equals its total assets.
earnings per share (EPS) it is equal to the net income divided by the number of outstanding shares.13
expense a cost of doing business; expenses include money spent on raw materials, marketing, salaries, and other items.
financial statements a set of four statements: (1) the balance sheet; (2) the income statement; (3) the statement of cash flows (the cash provided and used by operating, investing, and financing activities during the period); and (4) the statement of retained earnings (which shows the change in the "retained earnings" account between the beginning and the end of the period).14
income statement a financial statement that shows how much money or revenue came in and how much money was paid out in expenses.1514
involuntary bankruptcy a situation when creditors file a plan to force a debtor into bankruptcy-court protection. The debtor can go to court to contest.16
liability a debt that is recorded on the balance sheet. Current liabilities are debts payable within one year. Long-term liabilities are debts payable over a longer period.17
liquidity when a company is able to pay its bills using cash or assets that can be turned into cash.
loss a reduction in the value of an investment, or a condition in which a company's expenses exceed its revenues. It is the opposite of proﬁt.18
material news (or material information) an event that could affect the value of a share. A company is legally obliged to file information about such changes with the relevant securities regulator. An example is when a CEO leaves a company, news which BlackBerry buried in its November 4, 2013, news release.
net income a company's total earnings after paying the costs of doing business, depreciation, interest, taxes, and other expenses. It is the same as net profit, and represents the proverbial bottom line. Do not confuse net income with operating income.19
Ontario Securities Commission (OSC) the largest Canadian securities commission. It is a self-funded Crown corporation, with a mandate to provide protection to investors from unfair, improper, or fraudulent practices and to foster fair and efficient capital markets in Ontario and confidence in their integrity.20
operating income the amount of money a company earns before deductions for interest payments and income taxes. It is also known as operating profit. Unlike the net income, it does not represent the bottom line.
price-to-earnings ratio a basic measure investors use to evaluate a company. To figure out the P–E ratio, divide the stock price by the earnings per share (EPS).21
private company a company that does not trade its shares on a public stock exchange. (Shares can be traded privately—for example, among a group of employees.)
public company a company whose shares are traded on a public stock exchange, and which is subject to the rules of securities regulators, such as the Securities and Exchange Commission (SEC) in the United States or the Ontario Securities Commission. Unlike private companies, a public company must disclose its financial information to the commission in question, which in turn makes it available to investors (the general public). The distinction between a public and a private company is an important one that a reporter should make before conducting research. You can also find the financial information on the companies' websites under sections such as "investor relations." Companies can make this material difficult to find, so it is important to search thoroughly when on the website.
profit margin the number that many investors and business reporters use to measure a company's financial performance. To get the profit margin, you divide the net income by the revenue. Or, defined another way, it is net profit after taxes, divided by sales for a given 12-month period. The margin is expressed as a percentage.22
operating margin like profit margin, this is also a measure of a company's health. It divides operating costs by sales.23
preferred creditor a creditor who has been given priority under the Bankruptcy and Insolvency Act over other creditors in the distribution of dividends.24
retained earnings the portion of company profits that has not been paid out to shareholders. This retained portion becomes part of the company's equity.
return on equity (ROE) this is a way to measure a company with competitors in the same industry. To obtain the ROE, divide the net income by the shareholder's equity. Return on equity assesses how well a company uses shareholders' money.25
return on assets (ROA) another performance measure journalists can calculate when writing about a company's health is return on assets. To obtain the ROA, divide the company's net income plus its interest expense by the total assets. The ROA measures how much money was made for each dollar of assets. If the company is doing well, this ratio will increase over time.26
revenues the cash generated for a company by a product or a service during a specific time period.
secured creditor a person or company owed debt that is backed by collateral, such as a car loan or a home mortgage.27 Secured creditors receive priority during the bankruptcy process.
security an investment instrument (or document) that offers evidence of a debt or equity. It is usually a stock (which is a form of equity) or bond (which relates to debt).
The System for Electronic Document Analysis and Retrieval more commonly known by its acronym, SEDAR, this website allows for a one-stop shop for journalists looking for financial information for companies that trade stocks in Canada.
shareholder a holder of stock who has a claim on a part of a corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares (or the stock owned by other investors).28 For example, if a company has a thousand shares of stock outstanding, and one person owns a hundred shares, he or she would own 10 per cent of the company's assets.
unsecured creditor a person or company owed debt, such as credit cards, medical bills, and utility bills, that are not backed by collateral. Unsecured creditors are among the last to get their money—if at all—during the bankruptcy process.29
stock a type of security that signifies ownership in a corporation and represents a claim on part of the outfit's assets and earnings. Stocks are the foundation of nearly every investment portfolio, and they have historically outperformed other investments over the long run. There are two main types of stock: common and preferred. Common stock usually entitles the owner to the right to vote at shareholder meetings and to receive dividends that the company has declared. Preferred stock generally does not garner voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority if the company goes bankrupt and is liquidated.
trustee in bankruptcy a person licensed by the superintendent of bankruptcy to administer a bankruptcy or proposal.30
Canada does not have a national securities regulator, at least not yet. The federal government has been pushing for one, but so far Quebec and Alberta are among the holdouts. Instead, we have loose coalition of provincial regulators, though there is still hopeful talk of replacing the provincial regulators with a national body. The Ontario Securities Commission (OSC) is by far the largest and tends to deal with the major Canadian companies (which is why we focus on the OSC in this book). The other Canadian regulators require much the same information as the OSC does. Websites for the major regulators are listed here:
- Alberta: www.albertasecurities.com
- British Columbia: www.bcsc.bc.ca
- Ontario: www.osc.gov.on.ca
- Quebec: www.lautorite.qc.ca/index.fr.html
The documents held by all these regulators can be searched using a special clearinghouse called SEDAR (www.sedar.com)—described earlier—which also contains links to profiles of each public company that trades stock in a given province.
The national regulator is the Securities and Exchange Commission (SEC) (www.sec.gov). The site has a limited search engine called Edgar. A more useful but expensive option is called Live Ed-gar.
State securities regulators can, and have, acted independently of the SEC, so it is worth checking their sites if you are conducting a serious investigation into a company that does business in the United States, such as BlackBerry. See the website of the North American Securities Administrators Association, at www.nasaa.org.
Tips on Financial Statements
We paraphrase here some advice that was offered to delegates at the Investigative Reporters and Editors (IRE) Conference on 6 June 2003:
Cash Is King
A company's real lifeblood is cash flow, not profit. Profit is simply the difference between revenue and expenses. Cash flow, found in the cash-flow statement, measures how effectively a company is managing its money so that it can expand, buy other businesses, or give back to shareholders. Or, in BlackBerry's case, survive. It's a bad sign when cash flow is decreasing. Best is what's called "free cash flow," which is cash flow from operations minus property and equipment purchases.
The balance sheet, not the income statement, tells a better story about the company's overall financial condition. You can find out whether a company's debt is growing or whether it's having trouble collecting from its customers. If the debt is increasing, is the company earning enough money to pay it off?
It Won’t Happen Again (Maybe)
Beware of costs labelled "non-recurring" or "unusual" or "one-time." Companies may be trying to disguise a systematic problem, and such charges could pop up again.
As we have already seen, the Form 8-K, which companies must file with the SEC in the United States, is the one to monitor because it may contain developments, such as the change of an auditor or the sale of a business that could affect the stock price.31
Quick Reference: What the Forms Tell You
You read about Forms 8-K, 10-Q, and 10-K (and their Canadian equivalents), as well as proxy statements, in Chapter 9. The following list also refers to Forms S-1, S-3, S-4, SC TO, and PRE 14-A (Proxy Statement), which are other documents that companies are obliged to file with the Securities and Exchange Commission in the States.
|Auditors and fees||Proxy statements|
|Auditor's resignation||8-K (Publication of Material Change)|
|Basic details of company's business||10-K (Financial Statements, MD&A, the Annual Information Form)|
|Bios and salaries of key employees||PRE 14-A (proxy statement)|
|Company's history||S-1, S-3, 10-K|
|Executive pay||Proxy statement, 10-K|
|Financial statements||10-Q, 10-K, S-3, S-1|
|Former executives||10-K (compare the most current one to the form from the previous year)|
|Legal trouble||10-Q, 10-K|
|Merger agreements||8-K, Proxy statements, S-4, SC TO|
|Related party deals (back scratching)||Proxy statements, 10-Q, 10-K31|
|Severance for ousted executives||Proxy statements, 10-Q (Interim Financial Statement), 10-K, 8-K|
Analysts as Journalistic Sources
Large Canadian and US companies are followed and monitored by analysts who work for brokerage houses, such as CIBC World Markets. In general terms, these brokerage houses buy stock for clients and manage their portfolios. It is the analyst's job to prepare reports for investors, who are clients of the brokerage house, on whether certain shares or bonds are worth buying. Most analysts who work at brokerage houses have beats such as transportation, or oil and gas. Analysts can tell you how well the industrial sector or even a specific company is doing. Depending on the analyst's viewpoint, the information may not be entirely balanced. So the reporter must be wary. Frequently, a company's financial health is judged against the expectations of analysts. BlackBerry, for example, was still losing money, but not as much as analysts had expected. This, combined with the company's health cash flow, has managed to keep investors interested and the CEO optimistic.
"You always have to be careful," warns Christopher Waddell, a professor of journalism at Carleton University.
Assume that people don't tell you something for nothing. They tell you something for a reason and you've got to figure out what the reason is. Subsequent to the Enrons and [other corporate scandals], there is now a much greater emphasis on disclosing when there are potential conflicts of interest between the analyst's employer and the company the analyst is talking about. And that also includes the analyst, too. You certainly find on an analyst's report a disclaimer page at the end, which will say that CIBC World Markets owns shares in this company, or acts as an investment advisor for this company. And the analyst may also own shares.33
Analysts also work for other institutions that invest money, such as the Ontario Teachers' Pension Plan. It is their job to examine the market, the economy, and the performance of certain companies to determine where the plan should be investing its money. However, Waddell points out that the analysts who tend to be quoted the most frequently in the mainstream media are those who work for the brokerage houses.
To get a sense of which analysts may be the best sources for balanced information, it is best to do what is done with any source: phone around and ask questions. It's worth asking some of a company's biggest investors, who are listed in its proxy filing. You can also contact a securities firm's public-relations department and acquire contact information for analysts, as well as information about the stocks or bonds they cover. Erik Schatzker of Bloomberg warns that "many analysts have been prohibited from talking to reporters or have to get clearance from PR."34
You can also check out debt-rating agencies, which evaluate the credit-worthiness of a company and government such as the province of Ontario before the 2014 election that returned Kathleen Wynne to power. Schatzker says that "the reports they produce can be more sober and less cheerleading than what some equity analysts write. The subject matter is, however, complex and the language arcane." The two biggest such agencies are Standard & Poor's (www.standardandpoors.com) and Moody's Investors Service (www.moodys.com/).35
Online Resources for Business Investigations
First, we list sites that might help specifically with stories about legal problems a company is facing. We follow this with a section on more broadly useful online resources.
- This lists all the civil lawsuits brought by the Securities and Exchange Commission in US federal court. It also contains archived releases.
- Archived proceedings go back to 2000 (for prior information, you have to phone the Ontario Securities Commission).
Disciplined persons list on the Canadian Securities Administrators website
- A searchable database of case law and congressional actions. Though costly, many news organizations have a corporate account.
- Pacer is a US courts service for electronic case and docket information from federal, appellate, state, and district courts, as well as bankruptcy courts. It is not as expensive as Lexis. Through his pursuit of companies that made drugs and other products, former New York attorney general (and more recently disgraced governor) Eliot Spitzer showed that investigations carried out at the US state level can be good sources of information about companies and executives.
United States Department of Justice
- According to its website, the department has become "the world's largest law office and the central agency for enforcement of federal laws."
Bankruptcy court documents
- This is the general site. You may need to find out the particular "circuit" where a case in question is located. If you know where a bankruptcy hearing might be taking place, you can follow the appropriate links. Incidentally, you could also visit bankruptcydata.com, which mainly offers a service that costs money but can also be used as a handy reference site. Plug in the name of a company you suspect might be going bankrupt—this may produce information showing that documents do exist and where they are located.
Office of the Superintendent of Bankruptcy Canada
- As we explained in chapter 9, this is an excellent site for finding individuals and business that have gone bankrupt, or are trying to cut a deal to stave off bankruptcy. Searches for individuals cost money, but are free for companies. To avoid paying, you can either ask an official at the office to conduct the search if you have an exact name (first name, middle name, and family name). Or, better still, open an account, something journalists can do for free, following the website's instructions. Be sure to explain that you're a journalist working in the public's interest, and not a business person conducting a search to make a profit. You may have to contact an individual in the office to get the process started.
Bank of Canada statistics
- An excellent and authoritative source for basic statistics which are key indicators of the Canadian economy's performance.
The Canadian Legal Information Institute
- As we mentioned in chapter 9, journalists seeking information about companies who have been taken to court can find them in this database.
National Class Action Database
- Though not definitive, an excellent database for digging up lawsuits against companies (General Motors) or individuals (doctors) in Canada being sued.
List of Class Action Lawsuits
- There is no all-encompassing US equivalent to the National Class Action Database, but this product liability data set is a good start.
Class Action Database (US)
- This, too, is another decent database for product liability suits.
- This is a Nexis product that charges a fee but offers some free services such as the latest news about companies.
- This is a very useful free online service. The search engine allows you to hunt for information on US government sites, plus others. It also offers other services, such as a legal dictionary.
General business-related resources
CLB Media Inc.
- A publisher of many trade magazines and other media services.
More business magazines
- A good source of business journalism resources, such as glossaries and back-grounders.
The McKinsey Quarterly
- A business journal.
Sources and experts
- The latter site allows you to search just for Canadian experts; look for the link.
The National Bureau of Economic Research
- A US-based non-profit research organization.
National Institute for Computer-Assisted Reporting
Commercial profiles (pay sites)
- Dun & Bradstreet: www.dnb.com/us
- Hoover’s Online: www.hoovers.com
- These are paid services that house profiles on thousands of public and private companies. They work more quickly than free search engines, providing information such as corporate histories to the number of employees, to sales estimates. You can get background information on key people such as the directors and CEO. Libraries often have accounts with these services. The information can also be obtained from media reports and other free sources, but these pay sites can be quicker and therefore more useful if you're on deadline.
Basic free finance sites
- These offer, among other things, up-to-date financial news and stock quotes. Keep in mind, though, that free finance sites can be just as likely to send you off in the wrong direction, so they are not great to use on deadline unless you know exactly what you're looking for. It's better to familiarize yourself with them when you’re not pressed for time.
3 Conrad C. Fink, Bottom Line Writing: Reporting the Sense of Dollars (Ames, IA: Iowa State University Press, 2000), 219.
6 Chris Roush, Show Me the Money: Writing Business and Economics for Mass Communication (New York: Lawrence Erlbaum Associates, 2004), 105.
12 Roush, Show Me the Money, 105.
13 Jay Taparia, Understanding Financial Statements: A Journalist's Guide (Portland, OR: Marion Street Press, Inc, 2004), 25.
14 Roush, Show Me the Money, 105.
15 Roush, Show Me the Money, 105.
16 Roush, Show Me the Money, 324.
17 Roush, Show Me the Money, 105.
21 Roush, Show Me the Money, 90.
22 Roush, Show Me the Money, 90.
23 Roush, Show Me the Money, 90.
25 Roush, Show Me the Money, 90–91.
26 Taparia, Understanding Financial Statements, 78.
27 Roush, Show Me the Money, 324.
29 Roush, Show Me the Money, 324.
31 William Baker, David Dietz, and Jonathan Weil., "Interpreting Corporate Reports"(Tipsheet at the Investigative Reporters and Editors Conference, Washington, DC, 6 June 2003).
32 Bloomberg, "Finding and Breaking News from SEC Filings," IRE tipsheet.
33 Christopher Waddell, interview with the authors.
34 Erik Schatzker, "Backgrounding US Businesses" (seminar at CAJ/IRE workshop in Montreal entitled "Crossing the 49th," 4 October 2003).
35 Erik Schatzker, "Backgrounding US Businesses" (4 October 2003).