Some investors find financial statements intimidating. When poring over annual and quarterly reports, those uninitiated in the black arts of financial analysis may have difficulty determining which numbers and ratios really matter. Should they turn to the management discussion and analyses, they'll likely find unduly optimistic assessments of the data, coupled perhaps with self-congratulatory histrionics. Financial analysts generally write for a sophisticated audience; plain language is seldom their strength. And analysts, too, are sometimes less than dispassionate.
Sageworks Inc., a small software firm in Raleigh, N.C., claims to have an antidote. Its web-based application, ProfitCents Public, analyzes financial statements from companies that file with the U.S. Securities and Exchange Commission (including Canadian firms listed on American exchanges). ProfitCents asks users which periods to examine, and it can compare successive years or quarters, or one quarter to the same quarter a year earlier. It then pulls various numbers and ratios, and compares them to other companies in the same industry. In about 10 seconds, it spits out a plain-English report that attempts to answer key questions, such as: Is the company liquid enough? Is it generating sufficient profits? How effectively is it using debt and assets?
“It's one thing to get financial statements, but it's quite another to understand what they mean, look at various ratios in combination, and then compare them to the industry,” says vice-president Drew White. “I would think it would be used as a research tool.” He adds that ProfitCents also covers firms too small to warrant attention from analysts. And because it's automated, the software lacks bias.
Had Prince Alwaleed bin Talal bin Abdulaziz Alsaud consulted ProfitCents before offering US$3.9 billion for Fairmont Hotels & Resorts Inc., a smile might have crept across his face. After examining its third-quarter results in 2005 to the same period the previous year, the software gave Fairmont rave reviews. “Liquidity conditions are very favorable based on this company's data,” ProfitCents reports. “The company is performing quite well–better than most companies in the industry.” Meanwhile, the software offers a contrarian view on EnCana Corp. Human analysts are bullish: of those listed by Bloomberg, 15 say buy, eight say hold, and just three advise investors to sell. But ProfitCents claims that while EnCana's profits and margins aren't too shabby, liquidity is a concern. “The company's return on assets and return on equity are poor,” ProfitCents opined when comparing third-quarter results in 2005 to the same period a year earlier. Jerry Zucker, meanwhile, would have been out of luck: ProfitCents doesn't cover Hudson's Bay Co.–nor does it cover banks and insurance firms.
Mark Rosen, a forensic accountant with Rosen & Associates in Toronto, is impressed with the software's plainspeaking approach. “I've seen others where it seems like a computer is spitting it out,” he says. “This one, it seems like somebody's actually written it.” That, however, is the extent of his admiration. “As for what underpins the analysis,” he says, “it doesn't do anything for me.” He warns that ProfitCents, like other quantitative tools, basically does simple ratio analysis. The problem is that no two companies are the same. “There are so many differences, and accounting rules are very poor at reflecting different industries, position in the life cycle of a company–all sorts of things,” Rosen says. “I definitely wouldn't suggest anyone rely on this for investing.”
Certainly, ProfitCents has limitations. Among them: it can't read footnotes (often crucial in understanding financial statements) and users can't see which companies it considers industry peers. But at US$199 a year per individual user or US$700 per user for corporate clients, ProfitCents is certainly cheaper and easier than obtaining a chartered financial analyst designation. You can check it out at www.profitcentspublic.com.