Management Discussion & Analysis
As a preface to the financial statements, a company's management
will typically spend a few pages talking about the recent
year (or quarter) and give a background on the company. While
this is not the guts of the financial statements, it does
give investors a clearer picture of what the company does.
It also points out some key areas where the company has performed
well.
Don't expect the letter from management to delve into all
the juicy details affecting the company's performance. The
management's analysis is at their discretion, so take it for
what it's worth. Things to look out for are:
- How candid and accurate are the
managers' comments?
- Does the manager discuss significant
financial trends over past couple years?
- How clear are the managers comments?
If they try to confuse you with big words and jargon
then perhaps they are trying to hide something.
- Do they mention potential risks
or uncertainties moving forward?
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Disclosure is the name of the game. If a company gives a decent
amount of information in the MD&A, it's likely that management
is being upfront and honest. It should raise a red flag if the
MD&A portion of the financial statement ignores serious
problems that the company has been facing. A good example would
be a company that is known to have large portions of outstanding
debt but fails mention anything about it in the MD&A. Withholding
important information not only deceives those who read the financial
statements, but in extreme cases also makes the company liable
for lack of disclosure.
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