Form 20-F

The Rules

When a company outside the U.S. wants to give American investors easy access to its stock, it can issue American Depository Receipts, or ADRs, essentially stock that trades on a U.S. exchange. The firms are required to file a Form 20-F annually.

The 20-F is a combination of an annual report (Form 10-K for U.S. companies) and a proxy statement (Form DEF-14A). As such, it offers a thorough overview of a company, including identities of executives and major shareholders, an overview of the business, a look back at the previous year, financial statements, discussions of risk, and an explanation of any issues requiring a shareholder vote. With all that information, these filings run long. The Royal Bank of Scotland’s 2008 20-F comes in just shy of 300 pages.

What to Look For

You can use this report much the same way you would use a 10-K or DEF-14A for a domestic company — look over the revenues and expenses, check out the balance sheet. Yet because 20-Fs are issued by foreign corporations, certain elements of the report differ. In particular, look for this important information:

• The currency effect. Some overseas companies report the financial results in their 20-F in U.S. dollars; others stick to their home currencies; and still others use both. To read the financial statements accurately, you need a sense of what impact currency fluctuations had on the numbers, which should be spelled out in management’s discussion of the results.

“A company could have a good year, with, say, 10 percent revenue growth in its own currency,” says Paul Larson, editor of Morningstar’s StockInvestor newsletter. “But if the dollar strengthened against the firm’s home currency, its revenues in dollar terms could shrink — and that might be what shows up in the 20-F.” The reverse is also true: A company could have a bad year — but it might look good in dollar terms if its home currency strengthened against the greenback.

• The political environment. Because foreign political and regulatory regimes differ from ours, 20-Fs devote more space to political discussions than 10-Ks do, often in the sections on company risks and management’s review of the year.

Pay particular attention if the firm operates in a heavily regulated industry. “If you’re investing in utilities in the U.K., like National Grid, you’re essentially making a bet that regulation will be stable,” says Larson. In this case, the 20-F should tell you how regulators are likely to deal with the company’s allowed rate of return.

Politics can be especially important in emerging markets — but don’t count on reading every salient detail in the 20-F. Take Chinese telecommunications firm China Mobile: The words “politics” or “political” appear just five times in the 150-page 2008 20-F, despite the fact that the company operates in a nominally communist country.