Financial Statements – What you need to know

The Importance of Financial Statements when Buying Stocks

As discussed in the “Reading Company Public Files” article, publicly traded companies in the US are required by law to disclose certain kinds of information by filing it with the SEC where it is readily available for review by any interested parties.

The three most important financial statements can be found in both the 10­K annual report and the 10­Q quarterly report. They are the income statement, the balance sheet and the cash flow statement. Annual filings via the10­K report are audited statements, while the quarterly 10­Q reports are unaudited statements.

When I first started buying stocks I found these financial statements dry and somewhat difficult to understand but today I’m able to quickly screen financial statements to determine if a company has strong fundamentals and value. Before adding a stock to my watch list I always review the financial statements.

Whether you enjoy reading financial statements or not, if you want to be a successful investor you should have at least a basic understand of each financial statement and know how to interpret the data in order to recognize if the company has value or serious problems that you want to steer clear of.

Income Statement

The income statement provides information on company revenues, expenses, and the net profit after taxes which is sometimes called the bottom line. The Income statement documents the financial performance over a period of time, most commonly quarterly or annually. Read further information on the income statement.

Balance Sheet

The balance sheet provides information on the financial condition of a company as of a certain date. It lists how much the company owns, referred to as assets, and how much it owes, referred to as liabilities. The basic accounting equation is Assets=Liabilities + Owners Equity. If a company has a large amount liabilities relative to assets this may be a cause for concern and warrant further research. Read further information on the balance sheet.

Cash Flow Statement

The cash flow statement documents the cash that flows in and out of a company. The income statement recognizes revenues and expenses when the transaction takes place while the cash flow statement documents when cash is received or spent. The cash flow statement is very important for the investor because you want to look for companies that are able to generate cash. Read further information on the cash flow statement.

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