Intro to Stocks Lesson 2
Balance Sheet Analysis

      There were going to be at least three questions that need to be answered in Lesson 2.  They are:  (1) does the company have any Net Tangible Equity (net worth to cash paid public stockholders)?; (2) is the company adequately financed or debt drunk?; and (3) is it actually a *business* or only a financing game for the benefit of the manglers? (my standard term for "managers" until proven to the contrary).  The answers to these first three questions all need to be assembled into a single coherent "asterisk at the beginning, never beyond column 77, four spaces at the beginning of each succeeding line" format.
      The specific company chosen for Lesson 1 is of course covered in my Note Files, so I already know that there are two additional questions that are going to need answers about "MRK".  They are:  (1) is the company respecting its cash paid public stockholders or feloniously stealing the equity for the benefit of criminal cronies in the stock manipulation busymess?; and (2) are empees being "rewarded and motivated" properly or has the company been turned into an authorized embezzlement scheme against the stockholders?.  Question (1) of the applicable second group winds up as a single coherent presentation. Question (2) actually consists of three separate presentations, as will be detailed later in this Lesson.
      TO BEGIN:  go to the SEC EDGAR web site and enter the ticker symbol "MRK" in the "Fast Search" right hand box that allows you to do so.  Looking down the list of available filings from MRK, the ones that you're going to need for this Lesson 2 are the Form 10-Q filed 181106 and the Form DEF14A filed 180409.  In many companies you would also need the Form 10-K filed 180227, but for "MRK" you won't.  Depending on when you actually go through this Lesson 2, there may be more recent versions of any of those Forms and you would want to evaluate the most recent.
      When researching a "new to you" company, always start with the most recent of that group of filings, in this case the 10Q.  Click on the "Documents" button since the other version is both confused and confusing.  With some companies, the content "could be" in other parts of the list of available forms/exhibits, but in this case it is the top one identified as 10Q itself.  Click on the red button for that and the web site brings up the form itself.
      Right at the top of what now shows, you will see the relevant date of the report.  Begin a line in your notepad file, above the address lines, with "*" and that date translated into YYMMDD format, followed by the words "Form 10Q shows on" to identity the nature of where you got all of the rest of the information.  Drop down the page in this case a full click worth and then a bit of rearranging to get your Notepad on the page and transfer the information into it.  What you're looking for next is the "numbers of shares outstanding" *translated* into millions of shares in the form "nnnn.nnn" rounding up if the last three digits of the full number are above 499.  Follow that numeric with the words "outs is" ("outstandings" is such a long word for such a simple concept).  But its one of the most important numbers in the Form 10Q since it tells you "how many" other participant shares there are in the company along with what you may (or may not) buy or already own for yourself.
      The next thing you want to look at is the "Consolidated Balance Sheet".  It varies from company to company whether that is the next thing in the filing or further down, but that *is* the next thing that needs to be evaluated.  WATCH OUT for getting the information from the correct column as "some guyz" switch the current report information and the prior comparison information columns around.  MRK does it the most normal way and is already reporting in $millions (WATCH OUT for this too since *where* the decimal point actually is varies wildly between companies of various sizes with the "most usual" being in $thousands which you need to translate into millions in the same way that you translated the numbers of shares out).
      Once you know the format in which the company you're researching is doing their reporting, wade on down to the "Stockholders Equity" section of that Balance Sheet.  There is usually a line next to the bottom labelled such as "total equity".  Just after the word "shows" in your prepared asterisk line with the shs out enter the word "Equity" followed by the number in millions that they show as being "equity".  It really isn't.  It's only CLAIMED EQUITY with lots of deductions required to evaluate.  But begin by presenting it as equity in your evaluation line.  There are often a group of complicating deductions to be made right off the top from that "equity" number which show in the "equity" section.  For example, many companies show a number next to the line "preferred stock" or may in fact have numerous kinds of preferred stock.  MRK doesn't but if they did you would enter the words "less Pfds" and the non zero number that they show.  Similarly an increasing number of companies these days show "Noncontrolling Interests" just above the total equity number.  Those are *minority* ownership interests which reduce the value of the common stock.  In this case you would enter the words "less Minorty Ints" and the number shown. 
      Many companies are brutally obfuscatory about something which MRK admits flat out.  It is part of the answer to Group 2 Question 1 regarding how much the manglers are STEALING from cash paid public stockholders for their criminal cronies in the stock manipulation busymess.  In MRK's case they're admitting that they stole $ at cost for some number of shares "bought back" (the only way treasury shares *can* get created).  Since that information is already in front of you and you don't have to go searching for it, go ahead and start a new asterisk line with the words "*Greenmail Payments indicated by Treasury Stock $nn,nnn for ###.### avg" by filling in the numerics you see in the report.  Since they're both stated in millions, then bring up your cute little desktop calculator with which all slopperating systems are endowed and divide the $ amount by the shares amount to come up with the "avg $" per share that they stole for their criminal cronies.  More on this later.
      Now go back up to the top of the balance sheet.  What you're looking for are claimed assets which are of no conceivable use to you as a cash paid public stockholder.  Doesn't matter that they "might be" of use to the manglers of the company.  It is only *your* interests that matter.  From reading my article about FLUFF you could already know about many of the kinds of FLUFF with which manglers pad their balance sheets to make themselves look "bigger" than they really are.  In typically shortened format, e.g. "Goodwill" or "Intangs" or "Oth Ass" enter each of those kinds of things as "less yadda amount(s) shown".  When something like Oth Ass has more than one entry in the "assets" area, simply use a "+" sign between the numeric amounts in your evaluation line.  In MRK's case, they have don't have "tax related" items but some companies have a plethora of such entries under variable names in which case label the entire group of "+" thingies as "Tax Items".  Bingo! you're ready to compute the Net Tangible Equity which is the only thing you actually own if you buy shares of MRK.  Add the word "net" and deduct all of the "less" items from the original claimed equity to fill in the amount just before the words "on nnnn shs is".  Then at the end of the now fleshed out line divide that "net" amount by the number of shares and insert it as "$nn.nn/sh tangible equity" at the end of your developing description line.  Good time now to make sure you get all that stuff back into the maximum column 77 format.
    With Net Tangible Equity per share computed (the answer to group 1 question 1), it's time to get into group 1 question 2, to what extent the company is Debt Drunk or adequately financed, i.e. is this going to be *your* company and that of your fellow stockholders or is it a sham literally and belligerently controlled by "lenders" in the bunko industry?  For this information you go on to the "liabilities" section of the balance sheet.  MRK has a majorly simplified presentation of how much they owe compared to the vast majority of debt drunks.  Add a ", also " after your tangible equity computation then insert the "LT Debt" pair of numbers "+ Tax Items" and its pair of numbers "+ Oth LT Liabs" and its number.  Although MRK doesn't have any, many other companies do have Pfds and Minorty Ints.  For the Pfds include not necessarily the number shown in the "equity" section but instead the "Liquidation Preference" amount if it is larger.  Also include the amount of the Minorty Ints since those actually are a liability in relation to the common stockholders.  Addemup and present them as "= ##,### LT Liabs is". Now comes the "fun" part where you find out how soundly financed your proposed company actually is.  Start by dividing those "LT Liabs" by (the original *claimed* equity number near the beginning of your evaluation line plus the LT Liabs) and present it as "is ##.#% of claimed cap, ".  Then divide those "LT Liabs" by (the computed "net tangible" number plus the LT Liabs) earlier in your evaluation line and present it as ", ##.#% of tangible cap,".
      To give you some idea what this debt evaluation *means*, anything above 36.5% but below 46.5% is "HIGH" and should be labelled as such just before the percentage itself. Between 46.5% and 56.5% it is "EXCESSIVE" and should be labelled as such.  At 56.5% and above it is "EGREGIOUS" and should be labelled as such.  Since I'm interested in *owning* something, as distinct from being a victim of the felonious foreclosers of the bunko industry, all stocks with DEBT LOAD EGREGIOUS are automatically excluded from purchase by me even if I have owned and continue to own shares for decades.  As a matter of didactic purpose, the original 36.5% number "used to be" the *median* of all indebted companies covered in the Value Line Investment Survey, prior to the felons of the Frauderal Reserve Bored preparing the entire American economy for mass bunko rapecies by their member bunkos, wiping out the entire interests of cash paid public stuckholders and leaving their providers of "Debtor in Possession Financing" and the criminal manglers who bankrupted the company in the first place in possession of ALL OF THE ASSETS while we cash paid public stuckholders get nothing at all.
      Onward to group 1 question 3 "is there any relevant actual business going on in that company?"  For the answer, you need to go to the "Statement of Operations" or "Statement of Income" (which may appear before or after the Balance Sheet for different companies).  Always use the longest period reported for your addition to the evaluation line, in this case labelled ", also 9mos Revs" and insert the ##,### number reported for 2018 (or whatever current reporting year it is when you're going forward in future years).  Adjust that number for the length of time to "annualize" the revenues reported, in this case, since it is a 9mos report, it would be "x4/3=" then divided by the number of shares outstanding that you gathered earlier in your valuation line and reported as "$##.##/sh estd Ann Revs".  Then bop on down to a line such as "Earnings per share" and, if it is a positive number add the phrase "on which profits are being reported".
      There are two possible complications for this group 1 question 3 information.  One is if it is a *negative* number reported as a LOSS (we'll get to that when you evaluate a currently money losing company). The other requires the price per share information that has been deferred because of the complexity of gathering it in meaningful form. While "MRK" isn't reporting a LOSS, you might see for some companies that recent stock prices have been considerably greater than seven times the estimated annual revenues.  PRICE REVENUES GREATER THAN SEVEN is a flat out exclusion which was described by the chief honcho of one of the plethora of dot cons and dot gones as "my company is NEVER going to be able to earn out that kind of a Price/Revenues ratio".  Getting back slightly under PRgt7 doesn't do any significant correction of the problems already created by having recently been a "blue sky" company.  What gets really silly are the incredibly numerous "research" companies hopa hopa HOPING to find some "miracle cure" for dread diseases who have absolutely nothing in the way of revenues and hence are PRICE REVENUES GREATER THAN SEVEN above a market price of $0.00.  "MRK" isn't *that* bad nor is it in the realm of that chief honcho's dictum, but this is something you always need to verify.
      I cautioned you at the outset that the vast majority of companies these days (93% I recall indicating) are NOT going to qualify, for one reason or another, for purchase by you or any sentient investor.  But do carry on with this your first company analysis "as if" it still had some chance of qualifying for purchase.  It may be "for educational purposes only" but the rest of the analyitical process needs to be learned too.
      In that second asterisk line that you created while evaluating the Balance Sheet, you've already got the basic information to answer group 2 question 1 "are they respecting cash paid stockholders or stealing the resources for their criminal cronies?"  Add the phrase "vs $##.##/sh tangible YYMMDD equity, difference ##.## x" and compute the difference between the "avg" you computed earlier and the net tangible equity you computed during the Balance Sheet evaluation.  Insert the number of shares you already know have been "bought back" and multiply them out in your Notepad followed by the phrase "net Greenmail Paid is -###.#% of remg equity".  The number that goes in there is the NET AMOUNT of stock buybacks computed as described divided by the net tangible equity that you computed earlier.  If there was Deficit Tangible Equity, you already know that ALL of the greenmail payments are fraudulent transfers to criminal cronies in the stock manipulation busymess, so you can omit the "net Greenmail Paid" computation.  But follow instead with "or $-##.##/sh STOLEN" and insert the number produced by the net Greenmail Paid divided by the number of shares outstanding that you've been using all along for other computations.
      I have already described Greenmail Payments of any kind as being felony theft of the ratable property of continuing stuckholders but there are certain comparatively low levels of such criminal theft which have simply become so common as to sort of justify ignoring them.  As you read in my article "The C
rash of 1987", it was His British Lordship the criminal mastermind Greedspan who *resumed* the practice of felony theft of stuckholders equity which had been virtually nonextant since the earlier mass banruptcies of Great Depression One (and were in fact the primary cause of that series of bankruptcies).  What Greenmail Payments do is to steal the most useful asset a company can have, cash, often replacing it by increasing their "borrowings" from felonious foreclosing bunkos, and give it away to criminal cronies for purposes of stock price manipulation (often by the same felonious bunkos "lending" their depositors' money for the criminal purpose).  Originally I tolerated up to 20% of remaining equity being stolen for stock price manipulation before excluding a company from potential purchase.  I have subsequently had to increase that to 40% before I class a company as GREENMAIL PAYMENTS EGREGIOUS, but I do use the intervening amount between 20-40% as a deduction from the maximum price that I would be willing to pay for some shares.  If the amount calculated for "MRK" were larger than -40% you should add the phrase "is GREENMAIL PAYMENTS EGREGIOUS" after the word "STOLEN".  If less than -20%, then "not a material decision factor".  In between, we'll discuss that later in the pricing lessons.
    As with most freeloading embezzlers, "MRK" does not report the information needed for evaluating group 2 question 2 in the quarterly report that you're looking at.  The question is whether their "options" practices are for the purpose of rewarding and encouraging empees or whether they are nothing but authorized embezzlements.  With the negatives already identified for "MRK", I would normally leave that matter unresolved.  But this is intended as an educational exercise and "MRK" is as good a place to perform the evaluation as would any of the other concealers of how much they're embezzling as anybody else would be.
      In order to get at the embezzlement numbers, you often need to go first to that DEF14A earlier identified.  However, MRK is not disclosing that information there, so you need to go to the FORM 10K filed 180227 for the period ending 171231.  On your way into a DEF14A, pick up the *date* of the annual meeting for which the DEF14A is the proxy statement.  Begin a new asterisk line under the Greenmail information lines as "*YYMMDD freebie stock options".  Using your <F3> search capability, search for the word "options" in that DEF14A or FORM 10K. You may find more than 100 such references and will need to bop on down through them one irrelevancy at a time looking for the table or notes which disclose what the total amounts are.  A whole slew of clicks later, you wind up looking at a nice neat table which shows "Equity Compensation Plan Information".  It shows, in most cases, two relevant numbers which you translate to millions of shares and add to your freebie line as "granted #.### + avails #.### ".  In MRK's case there is only a note showing the total number of shares "reserved" for such things.  Way back in the notice of the meeting, there "may have been" some new additions to the authorized embezzlements.  There weren't in MRK's situation.  If there were, insert that number as "+ #.### addns2018 =".  Addemup and enter that in your freebie line followed by "vs ###.### outs is ##.#% raw intrusion into ownership" and compute what that percentage now is.  There are some potential complications in this for companies ("MRK" isn't doing it) who have "escalator" clauses in their freebie stock options plans (often found among fraudulent dot con and dot gone craporations).  I'll talk in detail about how to handle such unduly complex situations when you run into one.
      As noted earlier, there are three parts to this embezzlement evaluation.  The next is to evaluate the Bored of Die Rectors on a new asterisk line beginning with "*YYMMDD" of the annual meeting "Directors" and then the word "annual" or "staggered" depending on whether they put their full slate up all at once or insist on protecting tenure of potential wrongdoers.  Go back to the DEF14A to locate this information.  Then the word "total" how many directors they've got altogether (which often takes running through the entire list to count them rather than relying on the smaller number shown as being "elected" this year).  Then review each director to see what they actually are along with being Die Rectors of this specific company and list the ones (by characteristic not by name) who are "questioned ## incl" when any of the following features show up:  geriatric (over 70 years of age and yes I know that I would be a "questioned" director these days if I were on a Bored), politicians of any sort, charity organization honchos of any sort (this isn't "supposed to be" a charity but a *business*), sports figures of any sort, venture capital affiliations, private equity affiliations, lawyers, doctors (everywhere other than medical product companies which MRK is), investment bankers (other than on investment bank boards), brokers and mutual fund managers (other than broker or Mutfun companies), educators (other than on education company boards), bankers (takeover artistes when debt load is expanded), persons formerly affiliated with the current Auditors of record (conflict of interest pointing to fudged financial reporting), and some others which aren't occurring to me instantly as I write this "but I know them when I see them".  The point is to identify those controlling persons who are most likely NOT to act in the interests of cash paid public stuckholders but in the interests of the often criminal gangs which they actually represent.
      Next count up how many questioned Die Rectors there are and insert that number between the total number and the word "incl".  Divide the questioned number by the total, add "1" and enter the result in your asterisked Directors line in the format ", for multiplier 1.##,"  The last item in the Directors line begins "Auditors of record" and shows the name of the auditors typically among the announcements of the agenda of the meeting but sometimes obscured way down into the body of the DEF14A.  In this case it's right in the agenda, so enter that name following the phrase "Auditors of record" followed by "for multiplier #.##x".
      Evaluating the auditing companies is a matter of lengthy experience with "how often" they have certified fraudulent and abusive financial reporting.  The following is part of my list of obvious ones with their multipliers and the phrasing to follow their names and my explanation of what I know about them:
      Ernst & Young multiplier 1.30x (incrsd re SEC sanctions), following decades of being the worst euditing company in the business)
      Price waterhouse Coopers 1.25x (incrsd re PSGQ, TYC, Gazprom, and BMY wrongs) just barely better than E&Y.
      KPMG 1.10x (incrsd re APWR frauds, FIFA bribery scandal)
      Deloitte & Touche 1.00x only one with a clean record
There are others who have developed fraudulence ratings that I'm not recalling right at this moment but you won't need them for the immediate evaluation of "MRK".
      So now you have two authorized embezzlement lines sitting just above the "addr" line:  immediately above the Directors and Auditors lines, and above that the freebie stock options lines.  Completing this process, you multiply all three of the computed factors together and prepare an asterisked line above the earlier two of the form "*YYMMDD" (of the annual meeting) Bezzle Factor ##.# (the intrusion into ownership number) x (1+questioned/total directors) x 1.xx (the auditor quality rating) then minus 1 to get it down to a percentage danger rating, e.g. 7.7 x (1+7/13) x 1.25 = 14.8% (pulled from "MRK"'s 2016 situation).  Add in the identifier "am18" (or whatever other year you have the information for) and then a normative based on the following scale: <12.5% "okay", up to 25% "high", above that to 37.5% "alarming", above that to 50% "dangerous", above that "ludicrous".

      Well now, if you've gone through all these evaluations of verbal information and gathered the relevant information into your NOTEPAD file.  If you wan to do so, you may email a copy to me for review :).  No, it wasn't "fun" (especially not for me who has done more than 5,000 of them) but it could help preserve what resources you manage to get together for investment.  So I hope that you were able to get through the process and go on to Lesson 3.
     Bob Grumbine    :-)##               Onward to Lesson 3               back to Bob Grumbine's Central Blogging Site