| |
Investment guides
Information and guides for the new or potential investor.
|
|
|
| |
|
|
|
|
|
| Statement Basics: Analyzing Statements |
Overview
When financial analysts evaluate a company for possible investment, they look both at the information in the financial statements and at other information that puts these numbers into a larger context.
Analysts can make more reliable investment decisions by taking the basic information in the financial statements and extending it to identify:
- A company's internal strengths and weaknesses
- Company and industry trends
- Performance in the larger business environment
Brokerage firms offer the results of their analysts' research to individual investors as part of their service. Additionally, many professional analysts sell their evaluations and recommendations. Examples of sources of financial analysis are Moody's, Standard and Poor's, and Value Line.
|
Interpreting the numbers
Analysts usually begin evaluating a company by studying its financial statements. These sources present recent financial history in a concise format, making it easy to see short term changes in key numbers. Financial statements are also fairly standard within an industry, making it easy to compare the performance of a company to that of its competitors.
Analysts interpret the numbers on each financial statement using a variety of ratios and other comparative measures. Analysis covers:
 Statement of earnings
Statement of financial position
Statement of cash flows
Analysis: Statement of earnings
Analysts use the statement of earnings to examine a company's profitability. For example, analysts look at trends in revenue, operating income, and gross profit rates (or margins). Other measures include calculation of return on assets and return on equity. To view IBM's performance over recent years, see the historical charts.
Analysis: Statement of financial position
Analysts use the statement of financial position to examine a company's liquidity and to gain insight into the state of the company's debt and inventory. One measure analysts use is the current ratio, a comparison of current assets with current liabilities. Analysts also look at the relationship of this statement with the statement of earnings. For example, they may explore the relationships of accounts receivable with sales, and of inventory with the costs of sales. Collection of accounts receivable is a task financial analysts also watch closely. If customers take long to pay for goods and services, accounts receivable may become large, forcing the company to borrow money (and pay interest) to finance these receivables. The longer it takes to collect accounts receivable the less valuable they are.
Analysis: Statement of cash flows
Analysts use the statement of cash flows to determine how effectively a company generates and manages cash. Analysts look most closely at the cash from operating activities in evaluating a company's potential for long-term success because this figure shows how efficiently the company can produce and sell its primary product or service.
Analysts also evaluate cash flows in relation to earnings figures (from the statement of earnings). For example, in some cases, a company can report positive earnings on the statement of earnings and still report a negative net cash flow on the statement of cash flows. This situation may occur when a company is unable to meet the current demand for its products and consequently invests its profits, or even borrows additional money, to expand its manufacturing capability (for example, by purchasing equipment or new facilities). When such a situation occurs, analysts look for the implications. They try to determine if the prospective demand for the company's product is great enough to justify the expenditures and new debt.
|
|
|
|
|
|
Statement of earnings
