Researching Risks

How can you research the risks facing various companies? Grab a company's 10-K report, which is issued once a year along with its annual report. These documents detail a company's financial and operational progress and also address risks facing the business.

For example, peruse the 10-K of coffee giant Starbucks (Nasdaq: SBUX) and you'll see the following risks mentioned: coffee price fluctuation, currency exchange rate fluctuation, and interest rate risk, among other things.

Delivery maven FedEx (NYSE: FDX) mentions the following factors that will affect its ultimate performance in the near future: pension costs, rising group health insurance costs, and fuel prices. Also noted are "the timing, speed and magnitude of the economic recovery; our ability to match capacity with volume levels and our ability to effectively leverage our new service and growth initiatives."

A Ford Motor Company (NYSE: F) 10-K cited greater price competition, declining sales resulting from slowing economic growth, currency or commodity price fluctuations, higher fuel prices, lower-than-anticipated residual values for leased vehicles, increased safety or emissions regulations, the discovery of defects resulting in recalls, and more.

Finally, here's another example -- just a small snippet addressing some of many risks faced by Apple Computer (Nasdaq: AAPL): "Some other key components, while currently available to the Company from multiple sources, are at times subject to industry wide availability constraints and pricing pressures. In addition, the Company uses some components that are not common to the rest of the personal computer industry, and new products introduced by the Company often initially utilize custom components obtained from only one source until the Company has evaluated whether there is a need for, and subsequently qualifies, additional suppliers. If the supply of a key or single-sourced component to the Company were to be delayed or curtailed or in the event a key manufacturing vendor delays shipments of completed products to the Company, the Company's ability to ship related products in desired quantities and in a timely manner could be adversely affected."

Together, these should give you an idea of the kind of candid information that companies offer in their financial reports, for those who bother to look for these details. There's a wealth of valuable information in the 10-K.

All companies have risks. Don't let them scare you away, but do consider them.

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