Getting the Most Out of Your Financial Reports

There are several ways to evaluate the health of a business, including by comparing the firm to its peers. They display the company's liabilities and assets, as well as its profit or loss during a certain time period and the evolution of its situation from their last statement. As long as you can predict a company's future course, you can also predict its stock price.

When it comes to investing, knowing the fundamentals of financial statements and putting that information to good use may help you avoid tomorrow's losses and find tomorrow's winners in the market.

A company's current worth may be estimated without regard to future events since financial statement analysis does not always take important news events, unanticipated incidents, changes in management, and other variables into account.

The following report explains and analyzes some of the most common financial statements. Investors should be able to utilize this information to make better judgments while doing their due diligence by understanding the figures and the simplest financial measures.

Accounts Payable

In annual reports, the balance sheet depicts the financial state of a business on a given date, generally the final day of the fiscal year. The company's assets are listed on the balance sheet's left side. Obligations, or what the firm owes, are shown on the opposite side, along with shareholders' equity, or the difference between the company's assets and its liabilities. The book value of a company's equity is a common term used to describe its equity.

Corporation liabilities and shareholders' equity equal the total assets of a company. To put it another way, the value that shareholders possess is equal to the difference between assets and liabilities.

The balance sheet is a useful tool in order to get an idea of the company's valuation, debt burden, and financial situation.

The Profit and Loss Account

The income statement, or profit and loss statement, indicates how much money the firm made and how much money it had to pay out in the form of salaries and taxes, as well as operational costs. An organization's annual profit or loss lies in between these two extremes. Net income is the money you have left over after paying all of your bills.

In other words, net profits are a measure of how much money the company "really" earned in a certain year. Low earnings are more advantageous than low earnings due to low sales, excessive costs, etc., if the firm utilizes a large portion of its money for research and development, acquisition of other companies, aggressive expansion, moving into new markets, etc.

Indicators of Financial Strength

This chart illustrates the year-over-year changes in the company's financial status. When it comes to financial reporting, a company's cash flow statement is also known as a profit and loss statement.

This statement may be used to evaluate a company's capacity to create cash internally, repay debts, reinvest in itself, and so on.

Sources of Financial Reporting

Of course, the corporations themselves may provide financial information. In most cases, they'll be happy to fax them to you or send them to you.

However, the information may be accessed more quickly through the Internet. Take a look at the stock quotations on Yahoo.com, for instance. Enter the company's ticker symbol, and Yahoo will deliver the most current news releases, which will contain the company's financial statements from the most recent quarterly and annual reports. For a more comprehensive picture of the company's trajectory, look back at past reports (i.e. increasing debt load, unpredictable earnings, decreasing revenues, erratic revenues, etc...).

It's not only Wsrn.com and BigCharts that provide comparable information; there are a number of other Internet services that do so as well.

Shop around for the best deal.

Look at the financials of three firms that you own or are interested in to get a feel for the terminology.

(Tally Sheet) Which company has the most in terms of long-term debt? Do any of these corporations have more liabilities than assets? Share price against shareholder equity (book value) Is the present share price significantly higher or lower than book value?

(Statement of Earnings) Were sales higher or lower than they were in the preceding period of time for the most recent year (or quarter)? The most recent time period in which the corporation earned (or lost) money per share

An Indicator of a Company's Changing Financial Situation Do you know whether the company's debt has increased or decreased? According to the statement, what was the company's biggest expense?

Making a decision

Investors should be aware that financial statements only give a partial picture of a company's fundamentals. They're only a small portion of the puzzle, however. Remember that although financial statements might assist investors in comparing multiple firms, the comparison is restricted to the data given.

You can see that one firm gained money and the other lost money, but you don't know which company has a better technical outlook (based on a review of the trade chart), which company is a possible takeover target, which company will have the best future profits, etc.

As well, the influence of financial statements tends to be long-term as it pertains to share values. Even if the stock price doesn't rise much after only one report, four consecutive quarters of improving earnings might trigger a bullish trend as investors begin to realize the underlying company's gains on a fundamental level.

As a result, financial statements are used by the majority of investors to aid in their decision-making process. A thorough understanding of and familiarity with the data may certainly help any investor who takes the time to make intelligent trading selections.

The most important thing to keep in

A large number of fast-growing enterprises do not need or anticipate positive profits. Due to their aggressive expansion into new areas, research and development, competition for market share with rivals and more, businesses tend to build up debt. Other firms, on the other hand, concentrate greater emphasis on real profits, reducing operating expenses and so forth.

If you don't comprehend a company's state or position, it's crucial to know what figures are significant or not relevant to them. For this, just visit wsrn.com and do an industry comparison for a certain business. The question is whether or not firms in the same sector seem to be making a profit. How big or tiny is the firm compared to the industry average, and how rapidly is it growing?

To ensure that the figures you're viewing aren't merely corporate projections or verifiable outcomes, read the tiny print. Most publicly traded firms don't have to worry about this, but it's still a good idea.

In many annual reports, sales or revenue growth is reported, but the firm really lost money, increased its debt, or had a bad quarter or year in the following paragraphs. Even if a company's overall results were disappointing, its financial statements are an important aspect of its marketing strategy, so it is essential that the information be presented in a favorable light.

One-time gains or losses should be avoided at all costs. Because of a large litigation settlement, for example, the company's profitability for the quarter will be positive. In other words, how would they have fared if the remarkable were ignored?