By Ben McClure
Whenever you're thinking of investing in a company it is vital that you understand what it does, its market and the industry in which it operates. You should never blindly invest in a company.
One of the most important areas for any investor to look at when researching a company is the financial statements. It is essential to understand the purpose of each part of these statements and how to interpret them.
Let's recap what we've learned:
- Financial reports are required by law and are published both quarterly and annually.
- Management discussion and analysis (MD&A) gives investors a better understanding of what the company does and usually points out some key areas where it performed well.
- Audited financial reports have much more credibility than unaudited ones.
- The balance sheet lists the assets, liabilities and shareholders' equity.
- For all balance sheets: Assets = Liabilities + Shareholders' Equity. The two sides must always equal each other (or balance each other).
- The income statement includes figures such as revenue, expenses, earnings and earnings per share.
- For a company, the top line is revenue while the bottom line is net income.
- The income statement takes into account some non-cash items, such as depreciation.
- The cash flow statement strips away all non-cash items and tells you how much actual money the company generated.
- The cash flow statement is divided into three parts: cash from operations, financing and investing.
- Always read the notes to the financial statements. They provide more in-depth information on a wide range of figures reported in the three financial statements.
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