Wednesday, February 22, 2006

Books Worth Reading: 2013 ANNUAL REPORT by CHEVRON

28 Alessandro-Bacci-Middle-East-Blog-Books-Worth-Reading-Chevron-2013-Annual-Report

Some years ago when I talked for the first time in my life with an investment professional he told me that there were two ways in order to do profitable investments:

A) Magically owning the newspaper (stock exchange values included) that will be published after one month or
B) Attentively reading companies' annual reports with their income statements, balance sheets and statements of cash flow.

The first method does not belong to this world so we necessarily have to resort to reading, which indeed takes time. Of course we do not have to consider annual reports as being the final truth about a specific company. In fact, many times accountants and financial professionals have to quantify elements that are not easily quantifiable and normally they do this quantification through assumptions and estimates, which also when carried out within the present legal framework produce certain biases in the evaluation. Accounting and finance "are as much art as they are science" as well explained Karen Berman, Joe Knight and John Case in "Financial Intelligence" (Harvard Business Review Press, 2013). But, unless company people have previously cooked their companies' books, the annual report may at least give us a good idea about how a company is performing.

I recently decided to insert in the section "Books Worth Reading" the 2013 Annual Report of the U.S. energy company Chevron. The reason is quite simple: After several years' worth of experience in the field of international affairs, I am deeply convinced that the modern manager (as well as the modern analyst, the modern adviser, the modern policy maker or the modern politician) has necessarily to be versed in all the different fields that affect his decision-making process. And one of these fields is finance. This does not mean that every manager has to be a first-class accountant or financial professional, but it is true that if a manager wants to understand the business where he works, he needs to have a good grasp of the financial side of this business.

Why did I choose Chevron? There is no real answer. A partial explanation could be that I like Chevron's logo — although I like many other energy companies' logos — and that I read constantly about Chevron because the U.S. company operates in Iraqi Kurdistan, which, together with proper Iraq, is one of the areas that I analyze constantly.  

The annual report is a good document to start with for a sound comprehension of the financial situation of a company. This report contains all the most important information and through the included notes it well explains the methodology the company used for compiling the statement of income, the balance sheet and the statement of cash flow.

Chevron, on the same webpage where it presents the 2013 Annual Reports, has attached three other important documents:

2) Chevron's Corporate Responsibility Report 2013
3) Conflict Minerals Disclosure    

Together these four documents could give us a good understanding of the financial state of affairs of Chevron.

In particular, the annual report on Form 10-K is the most detailed form. In the United States, the Security and Exchange Commission (SEC) requires publicly traded companies to file several forms. Form 10-K gives a comprehensive summary of a company's financial performance including information related to the company history, its organizational structure, executive compensation, equity, subsidiaries and audited financial statements. In practice Form 10-K is a more detailed version of the company's annual report without all the promotional documents that a company inserts in its glossy annual report.     

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