Management Streamlined

To get the bigger picture, you may want to turn to a stock index, an indicator of market trends calculated by averaging several stocks. You'll note that at the beginning of the stock tables section of your newspaper are several market indicators. The two most widely used are the Dow Jones Industrial Average and the New York Stock Exchange Composite Index.

The Dow Jones Industrial Average is computed by averaging the day's prices in 30 key companies. The Dow is recorded in points that do not convert into dollars and cents. In general, a rise in the Dow over time is considered a sign of economic health for the nation. A drop over time is sign of an economic downturn.

The New York Stock Exchange Composite Index is an average of the price changes of all the common stocks listed and traded on the New York Stock Exchange. It is expressed in index points relating the current index value to a base index value. (The base for the NYSE Composite Index was set at 50.00 on December 31, 1965.) In calculating the index, the price of each stock is multiplied by the number of shares in the hands of the public. As a result, corporations with the most shares will have a greater effect on the index.

The NYSE Composite Index is the only major measure that reflects the whole NYSE market. In addition to being recorded in newspapers, it is computed continuously after every transaction and transmitted electronically to the Trading Floor and brokerage houses every 15 seconds. Other major market indicators include the Standard and Poor's Indexes, NASDAQ Index, Amex Index, Value-Line, Russell Indexes and Wilshire 5000.

READING ANNUAL REPORTS

For more complete information about an individual company's financial health, you may want to review the company's annual report. Each NYSE-listed company is required to issue this financial report card to its shareholders. In the report, a shareholder can find detailed information about the company's economic condition and management policies. Annual reports help shareholders evaluate their investment and decide how to vote at the next shareholder's meeting. But they are also helpful to potential investors - people who are considering buying shares in the company. You can get an annual report simply by asking the company for one. Here are some of the key topics contained in most annual reports:

The Balance Sheet:
A summary of assets and liabilities that offers a "snapshot" of the company's financial health at a specific point in time. A balance sheet compares data from the end of the current year with data from the end of previous year. The first section lists all the company's current assets, or resources. For example, a tennis ball company might list as its assets cash, outstanding bills, inventories (all the finished tennis balls, plus all the supplies used to make the tennis balls), the tennis ball factory itself, the land the factory is built on, and the tennis-ball-making machines

The second section lists liabilities, or debts. The same tennis-ball company might list as liabilities its accounts payable (money owed for tennis ball supplies), unpaid wages, outstanding loans, taxes, and the dividends it will pay to shareholders.

The liabilities section also includes stockholders' equity, the value of all the stock owned by shareholders. This section lists the value of the company's preferred and common stock, the money made from selling stock, and the profits that have been reinvested in the company. The assets side of the ledger must equal the liabilities section, hence the name balance sheet.

Stockholders' equity is also called the net worth of a company. It is not a tangible amount of money stored in a bank, but the value of all the shareholder investment in the company.

Statement of Income and Retained Earnings:
If the balance sheet is a snapshot of the company's finances at a single moment, the income statement is more like a movie. It links together several balance sheets and shows the company's financial performance over the period of a month, a quarter, or even several years. The income statement tallies up all income, subtracts expenses, and shows how much money is left to reinvest in the company. It compares that number over a period of time.

Statement of Changes in Financial Position:
This statement deals with working capital - money used on daily operations of the company. The statement, which may compare several years, shows how much working capital was available, and how it was spent.

Accountants' Report:
Every annual report includes a report from an independent accountant. The accountant's report usually says that the annual report is a truthful reflection of the company's finances. It states that the report was compiled in compliance with normal auditing standards and accounting principles. The accountant will note if the annual report fails to meet one of these standards.

Understanding a company's financial status will help you make appropriate investment decisions. The next chapter will help you even more - you'll find out why stock prices fluctuate and how to anticipate a stock's performance.