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How to Interpret and Profit from Financial Statements?

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How to Interpret and Profit from Financial Statements?

Windowofworld.com – Financial statements are a useful tool for assessing the health of a company, and for comparing it against its competitors. They show what the company owes and owns, the profit or loss it has made over a certain period, and how their position has changed since their last statement. Generally if you can figure out which direction the company is going, you can predict the future stock price quite accurately as well.

Acquiring basic knowledge of financial reporting, and applying this knowledge when choosing or valuing investments can help you select stocks that will win in the future, while avoiding future losers.

Of course, financial statement analysis does not always take into account significant news events, unforeseen incidents, management changes, and other factors that can affect share prices, but provides a starting point for measuring the current value of shares, regardless of the future. incident.

The following report details, some simple financial statement explanations and analysis methods. While the topic can get much deeper and more complex, this article is designed to give investors the ability to understand simpler financial numbers and ratios, and can use that knowledge to help them make better decisions when conducting due diligence.

Balance sheet

The balance sheet shows the company’s financial position on a specific date, usually the last day of the company’s fiscal year for annual reports. One side of the balance sheet shows what the company owns and owns, which are called assets. The other side represents liabilities, which are the company’s debt, and it also has shareholder equity, which represents the company’s excess assets over its liabilities. Shareholder equity is often referred to as book value.
Total assets are equal to the company’s total liabilities plus shareholder equity. In other words, remove the liabilities from the assets and the remainder is what shareholder value has.
The balance sheet can be used to reveal company value, debt expense, and cash position.

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Income Report

Also called the Income Statement or Income Statement, it shows how much income the company received during the year from the sale of its products and services, and the expenses the company incurred due to salaries, taxes, operating expenses, etc … The difference between the two is profit or loss company for the year. The amount that remains after tax is net income.

Net income basically shows how much money the company actually made during the year. Some companies can earn low incomes if they spend a lot of their money on research and development, to acquire other companies, encourage aggressive growth, move to new markets, etc., which is much more profitable than if the companies have low income because they don’t. t generate a lot of income, their expenses are too high, etc …

Change in Financial Position Report

It shows how the company’s financial position changes from one year to the next. Also called a cash flow statement, it details how the company generated and spent its cash during the year.

This statement can be used to evaluate a company’s liquidity and solvency, and to assess the company’s ability to generate cash internally, pay off debts, reinvest itself, etc.

Sources of Financial Statements

Surely you can get financial from the company itself. Most will be happy to fax you, or send you the latest quarterly and annual reports.

However, a faster way to access this information is via the Internet. For example, go to Yahoo.com and select a share price. Enter a ticker symbol for the company you are interested in, and Yahoo will provide its latest press release, which will include the latest quarterly and annual reports with financial reports. You can also check past reports to compare the direction in which the company is moving and look for trends (i.e. increasing debt burden, unpredictable income, decreasing income, volatile income, etc …).
There are also many other Internet resources that provide similar information, such as wsrn.com, bigcharts.com, (canada-stockwatch.com for Canadian issues), etc …

Comparison Shopping

To familiarize yourself with a few numbers, try looking for the financial statements of the three companies you own or are interested in.

(Balance Sheet) Which company has the largest long-term debt burden? Are there any companies that have more current liabilities than current assets? Compare the current share price with shareholder equity (book value): is the stock price significantly greater or less than its book value?

(Income Statement) What was the revenue from the last year (or quarter) and does this represent an increase or decrease from the previous period? How much money per share did the company earn (or lose) in the last period?

(Change in Financial Position Report) Has the company’s debt increased or decreased? What are the biggest costs incurred by the company according to the statement?

Decision-making

Understand that financial reports can give investors a partial picture of a company’s fundamentals. They represent only one piece of the puzzle. Keep in mind that, although financial reports can help investors compare several companies, comparisons are limited to the numbers provided.

In other words, you can see that one company is making money while the other is losing money, but you don’t know which one has the better technical prospects (based on trading chart analysis), which is the potential takeover target, which will have the best future earnings. , etc …

In addition, the impact of financial statements tends to be long term because it relates to share prices. Four quarterly reports showing increased earnings could push stocks into an uptrend as markets begin to recognize the fundamental improvements of the underlying company, but a quarter of the increase in earnings may or may not have a significant impact on stocks.

Therefore, most investors use financial reporting as part of a larger overall decision-making process. Of course, however, understanding and being familiar with the data can be beneficial for any investor who takes the time to make smart trading decisions.

Important point

Many developing companies do not need or are expected to have positive returns. Instead, they generally accumulate debt because they focus on research and development of new technologies, aggressively move to new markets, fight for market share with competitors, etc … Other companies with minimal growth prospects on the other hand, are more concerned with actual income, lowering costs operational, etc …

Be sure to understand what numbers are and are not important to a particular company based on their current situation and position. This can be done easily by going to wsrn.com and conducting an industry comparison of the companies in question. Do companies in the same industry appear to have positive earnings, or are they focused on growth, research, etc… Are they companies that are bigger or smaller than the industry average, and are they growing faster than others?

Read the fine print to make sure the numbers you read are audited, not just company estimates, or unverified results. This is generally not something you need to worry about with most of the companies listed on the exchange, but it is an important practice.

Many annual statements will begin with positive news about sales or increased revenue, or other positive commentary, but further reading reveals that the company actually lost more money, increased debt, or had a bad quarter or year. For most companies, their financial statements are part of promotional material and they need to make the information sound as impressive and positive as possible, even if the overall results are disappointing.

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