What can a company’s financial statements tell you about the investment potential of its stock?
There are three things I would want to learn from a financial statement before I invested my hard-earned money on a company’s stock.
First, I would want to look at the balance sheet. The balance sheet will tell me the financial position at a given point in time. It shows the companies current assets, fixed assets, and total assets. The balance sheet also shows me the liabilities and owner equity. Liabilities are monies that the company owes, and include notes payable, accounts payable, and expenses. The owners’ equity tells me how much money the shareholders are making from their investment.
The next item I would want to look at is the income statement. As opposed to the balance sheet, which gives me a look at where a company stands at a given time, the income statement will give me a broader picture of the firm’s financial performance over a period. Here I can see if the company is earning enough revenue to cover their operating expenses.
The final item I would want to look at is the statement of cash flows. The statement of cash flows shows me where the money is coming from and how it is being spent. It allows me to analyze whether management is spending money wisely, or if they are wasting it frivolously. These cash flow statements, along with the balance sheet and the income statement, will give me a good idea of how the company has operated in the past, and how it is likely to operate in the future.
