Everything in this world has a given lifespan or life cycle and, as with living things, the life cycle for companies may be either short or long. Whether measured in years or decades (or even centuries), knowing that a company may get terminally ill and die at some point during your own lifetime makes it that much more important to review financial statements. Doing so can provide clues as to whether or not the company is ill. For example, consistently slowing sales and a shrinking gross profit margin can be a good (if you can call it good) indication that the company is about to go into cardiac arrest.
Unfortunately, however, there are some people who refuse to see the forest through the trees and firmly believe there is no way certain companies could ever die (think Apple or Google); but they can and they do (think Crox, Kodak, RIM and Yahoo). They will buy the company’s stock, ride it all the way up in price and then all the way back down into bankruptcy. I’m certain there are people who could never have imagined that Kodak (a 200+ year old company) would ever fall into bankruptcy (but, alas, it has). They purchased the company’s stock many years ago (or inherited shares from their grandparents) and then became complacent and forgot about them, only to awaken one day to the news the company had filed for Chapter 11 bankruptcy.
Being a good investment at one point in time does not mean that the given company will be a good investment for all time to come. All of the bubblicious episodes over the past several decades (think dot-com) are a testament to that fact. They have brought times of of great prosperity to many companies and investors. On the flip side, however, the party always comes to an end at some point and you should always be listening for the “last call” announcement.
As can be seen from these two financial statements for Kodak (i.e. the Cash Flow Statement and the Income Statement ) Kodak was losing money over (at the very least) the last three years. That which is most telling is the losses that can be seen in the Cash Flow Statement. Those losses indicated that Kodak was not making money in its core business, which is a BIG red flag. Any investor who followed Kodak’s financial reports would have seen that the company was in trouble and would have, wisely, gotten out.
Kodak is a good example of the importance of not becoming too complacent with your investments, and the need to watch over them. My mother, who was a nurse, used to say: “An ounce of prevention is worth a pound of cure.” In the case of your investments, an ounce of time and work may save you pounds of loss and heartache.
Note: Click on images to open pdf files.
Source: Yahoo Finance
