Devoted to Managers and those that seek to improve their management skills

A Tale of Two Annual Company Reports

Warren Buffett has always said that candor is one of the key assets that great managment will have. But he's always spoken against some of the nonsense in annual reports that is passed off as the state of the company.

The more complicated something is portrayed as, the more in trouble you can count on it being. Here's a couple of excerpts from recent reports Porter Stansbury talked about that gives us a perfect example of this:

First Company:  "Let's look at a summary balance sheet and earnings statement for the entire group. This motley group, which sells products ranging from lollipops to motor homes, earned a pleasing 25% on average tangible net worth last year. It's noteworthy also that these operations used only minor financial leverage in achieving that return. Clearly we own some terrific businesses."

Second Company: "Net income for 2006, excluding special items, of $2.2 billion, or $3.88 per share fully diluted, compared with a net loss of $3.2 billion, or $5.67 per share, in 2005, marking a $5.4 billion improvement. Including special items, [the company] had a net loss of $2.0 billion, or $3.50 per share for 2006, compared with a net loss of $10.4 billion, or $18.42 per share in the year-ago period."

Do you have any problem recognizing which company is in trouble? I hope you realized it is the second one. Who are these two companies? The first is taken from Berkshire Hathaway's (BRK-A) annual report, and the second from the annual report of none other than General Motors (GM).

When you meditate on this for a moment, the gibberish presented as a report from GM didn't have to be put out in ways that nobody could understand. Is there anybody that understands the health of businesses that doesn't know the condition of GM? What I personally don't like about this is that it doesn't make me confident at all in the leadership of GM. Why put out nonsense like that which pretty much says nothing? Is it really that bad? I think it is. But to hide it behind the type of numbers and language used in their annual report says something about the type of people running the company to me.

Why not just lay it all out on the line? The true condition of the company is the true condition of the company. There is one of two things that's happening here. Either the company and managment knows what's going on but doesn't want the public to know, or the leadership of the company literally has no idea what the true condition of the company is. Either way reveals what the condition of the leadership in the company is; and it's not reassuring. The future of GM looks grim if the truth about it can't or won't be told.

Other Buffett Resources:

Wisdom of Warren Buffett

Warren Buffett, investor

Warren Buffett: The trouble with being a legend

Warren Buffett: 'I told you so'

Company growth

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