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much equity when liabilities should be funded with bonds (of course, companies fund with equities to boost their actual and expected returns).
Conclusion
For evaluating stocks that have a pension plan, you can do the following:
1. Locate the funded status (fair value of plan assets minus projected benefit obligation).
2. Check the trend and level of the following key assumptions:
• Discount rate: make sure it is conservative (low) enough. If it's going up, ask why.
• Expected return on plan assets: is it conservative (low) enough? If it's significantly higher than the discount rate, be skeptical of the pension expense.
• Rate of salary increase: is it high enough?
3. Check the target and actual allocation of the pension plan. Is the company making sufficient use of bonds to fund the pension liability (conversely, are they overly exposed to equities)?
Conclusion and Resources
Let's summarize the ideas discussed throughout this tutorial according to a few major themes:
Let the Business Model Shape Your Focus Areas
The average 10-K annual report is stuffed with dozens of dense footnotes and adjusted numbers offered as alternatives to the "recognized" numbers contained in the body of the income statement and balance sheet. For example, companies often disclose six or eight versions of earnings per share, such as the "as reported," "adjusted," and "pro forma" versions for both basic and diluted EPS. But the average individual investor probably does not have the time to fully assimilate these documents.
Therefore, it may be wise to first look at industry dynamics and the corresponding company business model and let these guide your investigation. While all investors care about generic figures, such as revenue and EPS, each industry tends to emphasize certain metrics. And these metrics often "lead" or foreshadow the generic performance results.
The table below illustrates this idea by showing some of the focus areas of a few specific industries. For each industry, please keep in mind that the list of focus areas is only a "starter set"--it is hardly exhaustive. Also, in a few cases, the table gives key factors not found in the financial statements in order to highlight their shortcomings:
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