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.
InvestingDiscover how to keep score of companies to increase your chances of choosing a winner.
InvestingFinancial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
InvestingKnowing what the company's financial statements mean will help you to analyze your investments.
InvestingLearn about the components of the statement of financial position and how they relate to each other.
InvestingLearn how to trace where your tax dollars and charitable donations are going.
InvestingThe best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
InvestingDetermine your net worth by making your own cash flow statement and balance sheet.