In this article, we cover the four most important Financial Statements for an Investor. It is important to analyze a company’s financials before we make an investment. Even if we don’t understand the business much, we can get an idea about the performance of a company just by analyzing financial statements.
If a company does well, it would be reflected in its financial statements. And, on the basis of that, we can track its historical growth trajectory.
We would just touch the surface and won’t go into the specifics. It is not possible to summarize everything in just one article.
Most important Financial Statements for an Investor
There are four Financial Statements that an investor should not miss:
- Income Statement,
- Balance Sheet,
- Statement of Cash Flows and,
- Retained Earnings Statement.
Through Income Statement, we can track a company’s revenues, expenses, and net earnings (profit or loss) for a specific time period. Through an Income statement, we can compare a company’s financial performance Year-over-year (YOY) and Quarter-on-Quarter (QOQ). Income from operations is also one of the most important items here. A company can report higher net earnings through other income sources. But, income from operations would show the actual performance.
Balance Sheet: There are three most important items here: Assets, Liabilities (or, claim of creditors), and Stockholders’ Equity. The following equation shows the relationship between these three items –
Assets = Liabilities + Stockholders’ Equity
It shows how a company is able to finance itself.
Statement of Cash Flows: Here, it is all about how a company generated its cash, where it was utilized, and the net change in cash balance. The statement shows if a company is able to generate cash or not through three main activities: operating, investing, and financing.
Retained Earnings Statement: Investors can use the Retained Earnings Statement to see if the company reinvests the earnings in growth areas or if it is utilizing it to pay dividends.
So, we have covered the basics. There are so many components in each of these financial statements that need to be looked at before making any investments.
