By Eleanor Bloxham, Chief Executive Officer, The Value Alliance

Everyone has their own way of analyzing companies. Many leave this task to the so-called experts. But serious investors have been burned too often recently. They are seeking the most effective techniques for analyzing the companies they invest in.

I have spent many years helping companies and boards analyze their own numbers and those of their competitors and customers and providing advice and education to them as well as to professional investment managers, analysts, and bankers. In this series of articles for Wealth Management Exchange, I'll be exploring what you can look for to avoid problem companies and get a better picture of what's really going on.

When digging in at the beginning, you will find it helpful to gather the information (income statement, balance sheet, cash flow and major footnote info) in its raw form. That means start with the documents produced by the company itself.

This method is usually preferably to using the various paid data sources for a number of reasons.

Besides the obvious reasons of having to sign up for the services, in my tests of the data over the years, I have found errors in the data provided by the services. You can't have a good product without a solid foundation. So start with the raw ingredients from the source.

Another reason to get your own raw data is that the services generally don't provide all the information you will need. They sometimes mash line items together, may not include all the footnotes, and do other things that hide key data.

How Far Back To Find Company Data

How much data should you work with? When I do an analysis, I like ten years of data, if I can get it, to get a sense of the history of the company - where it has been and where it is going. Try to get even more if the CEO has been in place longer than ten years.

One issue that arises with all the mergers and acquisitions that have occurred is the decision of which company's data to use over the years. While you could try to get them all, sometimes that isn't practical. Simply going by the name may not be the best answer either - because sometimes the company changes its name but the management actually running the place came from the firm whose name was dropped. One of the two firms may end up representing the bulk of the operations in the final firm. So it depends on the circumstance - and the practicalities of data availability.

In any event, start with one or two years prior to the current CEO's induction. You can learn a lot about the CEO's effectiveness by viewing the firm's entire history - and that requires looking back at the results before the CEO joined.

CEO's Performance and Stock Price

Here's an example for a company I analyzed a few years ago. After his initial tenure with the company, this CEO of a widely followed firm was touted in the popular press as a supercharged turnaround agent. He looked like he was, too, if you didn't look back too far. However, analyzing the year or two before he started, gave a very different picture.

Exhibit A, for example, showed what the earnings looked like before and after he joined the company. The annual earnings before he joined were much higher than the numbers reported by the company the first year under his watch. Several years later the earnings on his watch just matched the level they had been before he took over.

Exhibit B showed what happened to stock price. Again, several years later, it was back to where it was before he came on board. However, the stock price was still off highs shortly before his arrival.

Despite this, the media loved him. By going back in time, you can gain a greater insight than you otherwise might have. Perhaps he helped the company - but you might dispute the supercharged turnaround agent perception.

Use Multiple Results Data

In addition to getting ten years or more of data, investors should also use multiple sets of numbers at the same time.

First, gather the numbers as originally provided by the company in their statements for the first time. For example, I like to gather the data from the quarterly and annual reports as they were first provided. Then, I like to gather the same data from those same time periods in later reports where they are shown for comparison purposes.

This is useful for a number of reasons. One is that looking at the numbers both as first reported and then as later reported can provide signals into what management may want you to look at and what they may not want you to notice. That can help you spot weaknesses you might otherwise not pick up on.

Another reason it is useful: it can often give you a better sense of the impact of mergers and acquisitions. As the results of the new company get included in later reports, it is often helpful to get a true bead on what things looked like before the company made the acquisition. By looking at the individual histories of the merged companies you can also get a better sense of this.

I remember writing to an investor relations officer once following a merger. The acquirer touted the earnings growth they had received from the merged company. I asked them what the run rate for the newly acquired company had been before the merger - and received the reply that they did not know.

Of course, they should have. And if you are analyzing a serial acquirer, you'll want to know too.

In the articles that follow, we'll get into specific issues you should evaluate when you look behind the numbers. In the meantime, if you have any questions you'd like addressed, please email me at ebloxham@thevaluealliance.com.

Copyright 2009. The Value Alliance Company. All rights reserved.