Do you sometimes, or most of the time, bother about your investments that is unremittingly showing a descending performance trend? Which company is worth investing in? On what factors does the success of a company depend on? Will it achieve or under-achieve the targets?
The answers to these questions can be a bit less vague and confusing if you can spare some time researching about the company. Several tools can assist you to recognize the financial health of your investments. However, the best and most precise piece of information can be derived through glancing at the financial statement of any given corporation.
A Financial Statementfinancial statement analysis
Figures in the statement won’t make sense if you fail to understand the meaning it’s depicting. To know the financial activities of the firm, it’s important to analyze the data scattered all over the paper. So let us first try to understand what a financial statement is and what it comprises of. It inevitably is divided in three major parts namely a balance sheet, an income statement, and a cash flow statement. Every part or section, individually, represents a unique portion of the organization’s financial image.
A balance sheet reveals the funds invested in assets, amount of liabilities and shareholder’s equity. Assets generally include cash, property owned, prepaid expenditures, inventories, and other such things where money is ‘invested’. This part of the balance sheet is used to note the financial status of any organization. However, the assets column can never be analyzed without considering the liabilities payable by the company. The liability section represents the amount to be compensated by the company in the given financial year. It could include accounts payable, pending remuneration, unpaid income tax, long-term debts, loans, etc.
But how do you determine the strength of the company with a balance sheet? The total of surplus assets for the year over existing liabilities is the amount termed as working capital. This working capital is used by the company to spend on the operating expenditures. If the company has enough assets to pay off the debts and spare for operating expenses, it is a good sign. However, if it doesn’t hold adequate cash to survive the debts, you should quickly liquidate the shares of this company.
As the name suggests, this document is a statement of company’s revenue. In some parts, it is also known as a ‘Profit and Loss Statement’.
It is divided into two parts: operating section and non-operating section. This operating section of the income statement is quite appealing for investors because it give a definite idea of the income and expenditures caused directly from the business. For instance, if a company is manufacturing cosmetics, the operating section will provide you with details of revenue generated through sales and expenses incurred for manufacturing of cosmetics.
Non-operating section reveals information about the income generated and outflow of funds on operations that are not directly linked to the company’s business. Say, if the cosmetics manufacturing company sells a locked factory, it would have an impact on the non-operating section of the Income Statement.
An income statement is used to know the gross and net profit of a company for a given period, which is enough to determine whether it’s worth investing in or not.
The outflow and inflow of funds through various investments, operations, and trades are recorded in this part of financial statement. All the previous transactions like sale of goods, purchase of equipment, etc are mentioned here. This is another important portion where the auditors and investors glance to know the financial standing of a company. Adequate funds ensure the ability of a company to pay their employees, creditors, or any other party.
If the company’s cash flow shows inadequate balance, it is very likely that the business will wind up soon. A cash Flow statement is very fundamental aspect of any organization’s existence and survival.
The reason people’s investments show a sharp depreciation is because most of they time they are carried away emotionally. ‘Kill your emotions’ is rule number 1 of investing. Do not invest in a company just because you love the products it offers, or because you just read an editorial that mentions sweet little things about the company’s culture. No, these reasons are not enough to fritter you valuable funds on. The first and the foremost reason you invested in ‘X’ company should be because you thoroughly analyzed the data that seemed favorable. Go through the income statement; compare the net profit of this quarter with last quarter and the same quarter last year. See whether the total of assets in balance sheet total is greater than the total liabilities. Can you see enough cash in the company’s cash flow that can help surviving and flourishing in the dreadful market conditions? Only then think about investing in a firm.
Look out for notes that come along with the financial statements. These notes reveal specific and significant news about the company which can be a vital piece of information for analyzing the data in financial statement. Generally, changes about to take place in the company are mention in the notes. It can include news on company’s decision to take over, merge, and be taken over, some debt being purchased by the company along with supporting reasons. These notes are nothing but precise details supporting the figures. Do not forget to read these notes. If you are investing a company, you are about to be a shareholder, which means a partial owner. So, know everything about your company.