When looking for investments to buy, you can look at many different factors. But before doing this, you must know what the data is that you are examining. You need financial statements.
An example of financial statement can be categorized into three main types of financial statements: balance sheets, income statements, and cash flow statements. Each of these gives investors an idea about how well a company’s management manages its assets, who its biggest customers are, how much money it has made or lost in a given period, and how much money it has left over after paying out dividends to its shareholders or keeping profits for itself.
A company’s financial reports also give insight into the potential future success of the business based on trends within the industry as well as within the markets in which a particular business operates. Analysts who study financial reports may come up with ideas that you, as an investor, can use to conduct your research and figure out whether or not a certain company’s stock is worth investing in.
If there is one thing you need to note from those in the finance industry is this: “Cash rules everything around me.” In other words, cash makes or breaks companies. A company with lots of funding available has more options than a company without funding available. This statement brings you the reasons why you need financial statements when looking for investments to buy:
1. A good example of financial statement tells you how much money the company has made in operating income or net income
This is extremely helpful to investors because it shows you how much money the company has left over after paying out expenses. If a company has more money than what it needs for operations then that is an indication that the company might be able to invest in future projects, fund acquisitions, or buy back its own stock, which serves as returns for shareholders. Operating income and net income are terms used by accountants to refer to the same thing, so they can be interchanged when determining whether or not a certain company is financially healthy.
2. Financial Statements show you how profitable a certain product line is
In addition to operating income/net income being displayed on financial statements, specific products within a companies line of business have their own operating margins listed as well on these reports. This is helpful when evaluating companies to invest in because it allows you to determine whether or not there are good opportunities to buy stock within certain areas of the company.
3. Financial Statements show you how profitable each unit sold is
Operating income/net income isn’t the only thing that has its own numbers listed on financial statements. Each product also has its own unit sold number included as well. Knowing this information allows investors to make inferences about future revenue generated by products currently being produced, as well as products that could be introduced down the line.
4. Financial Statements tell you how many customers a company has and their buying habits
It’s easy for an investor to find out what market share a particular company holds just by doing some research. A market share tells investors how many customers a particular company has in comparison to its competitors, but financial statements give more insight into the makeup of those customers. Financial statements list who a company’s biggest customers are and whether or not these large customers represent a significant portion of the overall revenue generated by that company.
5. Financial Statements tell you how much money is being spent on Research & Development
Not all companies invest their earnings back into making themselves better, but those that do will have good returns for shareholders if they make innovations with their products and find new ways to generate revenues at a faster rate than costs increase.
6. Financial Statements tell you how many assets a company has
If a company has more assets than liabilities then it can use those assets to generate revenues that will turn into earnings. You can use key ratios to determine whether or not a company is solvent, but its balance sheet tells you what the financial state of the company actually is at any point in time.
Also, knowing the company’s financial standing is important to make sound investment decisions. For example, if you’re planning to buy stocks, you need to estimate a business’s intrinsic value or the true value of a business, which can be lower or higher than the actual and current market price.
This is where financial statements can help. They can provide information on how many assets a company has or its total net worth.
However, net worth alone cannot provide an accurate assessment of a company’s intrinsic value. Therefore, financial analysts use various intrinsic value calculation methods, such as discounted cash flow analysis, to determine the true worth of a company. If you need more information about computing intrinsic value, you can check out reputable websites like Wealthy Education and other resources online.
7. Financial Statements tell you how much money is owed
If a company owes more than it has then it’s not going to last very long without either increasing its revenue or making acquisitions. This statement holds true for both businesses and individuals because if an individual spends more than they make, eventually they are going to go broke. Working capital also plays an important role because it helps investors understand which companies could be undervalued based on their current cash flows as well as their ability to pay off debts with ease should interest rates change.
Moreover, working capital is essential because it helps businesses make significant investment decisions in a way to avoid liquidity issues. Hence, with the help of financial statements, you can analyze the income, expenses, and other payables as components of the working capital to determine the business’s liquidity, including the amount of money owed. This allows the company to implement effective ways to pay off the debts and manage the capital correctly.
If you see this ability on the financial statements, it can indicate that the company can be worthy of your investments in the hope of maximizing your returns in the long run.
8. Financial Statements tell you who a company’s creditors are
In addition to telling you how much money is owed, financial statements also show investors who the largest creditor of a certain business is and whether or not it has been able to successfully pay off its debts in the last few years (based on time span listed).
9. Financial Reports indicate where debt is located within the company
Creditors don’t just finance debt for businesses; they also provide necessary capital that can be used for other purposes like buying new assets or making acquisitions. Investors should know exactly how much debt has been accumulated to make sure companies aren’t borrowing too often without putting up any collateral. Debt financing has become increasingly important over the past decade because as long as interest rates stay low, companies will be able to acquire more debt from creditors.
Make Research and Reading a Habit
It’s easy for investors to look at a company’s financial reports and make some quick conclusions about its value proposition, but doing so is often easier said than done because most businesses don’t include all of the necessary information they would need to comprehend their business model.
As an investor, it’s up to you to spend time researching and reading on key resources like annual reports and 10-Ks so that you can understand exactly what type of opportunities are available within certain areas of a business. The more you know about a particular business before making your first stock purchase, the better off your chances will be of turning a profit sooner rather than later.
If you ever find yourself researching what other information a financial statement should have, or maybe you need to create your own, visit Venngage for comprehensive financial statement templates you can use, or even refer to when you need a resource on what a good example of financial statement should contain.
