The primary objective of a stock investor is to understand and analyse balance sheets, cash flow statements, and income statements to project the status of investments of a business and enable the company to invest in the right places. To do that a stock investor deals with huge volumes of data cropping up regularly in company financial statements.
However, it is necessary to understand the immense variety of financial reporting by familiarising with certain attributes of a financial statement, before we focus on individual corporate financials.
Here, we try to shed some light on the offerings of company financial reports and how they can be used profitably.
About Financial Statement
Financial statements are ledgers which keep a detailed record of the business endeavours and financial status of a company. It includes balance sheets, income statements, and cash flow statements, that are typically audited by accountants and government organisations for maintaining transparency, accuracy, and tax reporting, or investment purposes.
Below is a list of 10 things you should bear in mind about a company financial report.
1. Financial Statement Reflects Company’s Economic Health
Whether you are investing in a mutual fund or directly in company stock, it’s important to investigate and pick a good company with well-maintained balance sheets, consistent profits, and positive cash flows.
Understanding the fundamentals of financial statements and being able to analyse and predict financial patterns is key to a good investor, whether you are self-driven or helped by experts. Instead of focussing solely on profits, assets, cash flow, and return on investment, it’s smarter to understand the scorecard of your target business entity.
2. Which Financial Statements to Use in a Report
To get a holistic view of a company’s financial track record, a consolidated financial statement should be used for evaluating investments. A consolidated financial statement is a combination of a balance sheet, income statement, and cash flow statement along with retained earnings and equity assessment of the company shareholders.
While the balance sheet and the income statement of a company financial report are mainly analysed by investors and experts, the cash flow statement remains an important component of the report and must be maintained properly.
3. What Do the Numbers Tell Us?
Everything that a company is involved in, from the products manufactured to services that are provided and other activities performed by the organisation, is portrayed in a set of numbers in the company financial reports. Thus, understanding these numbers to extract the real data from this quantitative information helps you to comprehend the reports and the projections from the same.
4. Variety of Reporting
There is no single formula to decode every financial statement. If you are less experienced, you might find yourself in a swamp when the presentation of a certain account doesn’t fit into the structure of a so-called “typical” company. The more type of business activities a company is involved in, the more diverse its financial statement looks like, which affects the balance sheet more than the income statement or the cash flow statement.
5. Accounting is an Art
The financial status of an organisation, as depicted in its budget reports, is affected by the board’s assessments and decisions. In the best-case scenario, the management may appear to be meticulous and honest, while the auditors are strict. Either way, the inaccuracy that can be commonly found in the accounting procedure implies that reasonable investors should adopt an inquisitive and suspicious strategy toward financial statement analysis.
6. Encountering Jargons
Learning the key terms concerning company financial reports is crucial since they are often filled with jargons, which could make it quite complex to understand.
7. Inadequate Non-Financial Information
While the company financial reports are a vital indicator of the financial health of the business, they fail to reflect an array of important markers such as the condition of the global economy, the situation of the industry, changes in technologies, labour force situation etc. Financial reports are important, but they offer only a portion of the larger picture when it comes to investment.
8. Financial Ratios and Indicators
The numbers in a financial statement are tied to their related fields. You must bear this in mind while assessing the financial performance of your company. Otherwise, you will get incorrect results from the evaluation. The subsequent proportions and pointers must be analysed over prolonged periods to recognise patterns. It’s noteworthy that the parameters can vary corresponding to the industry, and the size and growth of the business.
9. Footnotes are Important
Numbers in a financial statement doesn’t paint the complete picture that the regulatory authorities look for. Hence, it is acknowledged by the boards that an understanding of the notes in a financial statement is imperative in the scrutiny of the financial health of an organisation. The same applies to investment analysis as well.
10. Consolidated Financial Statements
A consolidated statement implies that a parent company and its majority-owned subsidiaries have an economic alliance even if they are independent legal units. The idea is that consolidation as one unit over separate statements for different units is more appropriate. Thus the word “consolidated” in a consolidated financial statement.