Andr OllrWhen trying to open up to opportunities for trade, look into the income statements, consolidated balance sheet, and the statement of cash flows. However, these three required financial statements provide traders with the information they need to gauge a company’s strength and determine whether it is or is not healthy or has an intrinsic value.
In this post, we’ll offer a brief overview of the key information these financial statements display without the necessity for extensive accounting expertise.
Three Main Financial Statements
Three financial statements that provide a picture of the company’s operations and overall capital position include income statement, balance sheet and statement of cash flows. Combined, these statements together give a complete picture of a company in terms of debt, revenue, profit and assets. They present a snapshot of the company’s efficiency and overall health as well as its growth potential. They also standardize how financial data is presented, which allows for comparisons across companies on an industry level, even outside of your industry.
At its very core, these documents guarantee that there is continuity in the communication of financial information to investors, potential investors, employees, and other stakeholders.
1. Income Statement
An income statement provides a company’s view of its operations over a certain time frame, generally a quarter or a year.
It’s broken into several sections which hold different types of transactions. The four key sections include:
- Revenue: The earnings from the company’s core product and services.
- Gains (Other Income): Any additional income beyond the core income from sales of a company vehicle, for instance, or from real estate or other non-core activities.
- Expenses: Labour, utilities and inventory.
- Losses: Money lost during unusual events, including lawsuits or losses from selling assets.
Regardless of what the specific income statement lines might contain, the income statements always consist of the same structure. For example, a business might say they made $2 million in the sale of various products, but not indicate how much they made off of each product. It is transparent, without divulging competitive sensitive information.
It reviews how well a company converts revenue into profit, and how effectively the company can control expenses and priorities such as research and development, expansion or labor.
2. Balance Sheet
The second key financial statement is a balance sheet which tells you what a company’s financial position is on a specific date, for example, the last day of the quarter or year, but it can be prepared for any date. This is about a company’s total assets and liabilities and shareholders’ equity.
Among the assets section, you’ll find each item from most to least liquid, including cash, accounts receivable, inventory and excessive assets from equipment and constructions. This illustrates liabilities and equity on the left-hand side, where short-term obligations appear as accounts payable, long-term debt and lastly stockholder’s equity and retained earnings. The balance sheet is always balanced, i.e. total assets are equal to amounts of liabilities and equity.
This statement helps determine a company’s financial prowess as it compares its assets, such as cash and accounts receivable, to its debt levels. Generally speaking, the stronger a company’s financial health is, the more assets it has in terms of liabilities.
3. Cash Flow Statement
A cash flow statement is the third most important financial statement reporting how a company generated and used its cash over a specific period such as a quarter or a year. This is a detailed view of the income statement which tells you exactly where the company is getting its cash in and where it is getting cash out of.
Usually, the most important section of the cash flow statement is cash from operations. Here we simply find out whether the company is experiencing a positive or negative cash flow (meaning that income is more than expenses). This can also point to trends that aren’t obvious in other statements, like a rise in inventory along with a fall in income (which might be an early warning sign that the company is having difficulty selling its products).
- Cash Flow from Operations
The income and expenses of a company are reported on the income statement, indicating when a company earns revenue or incurs expenses, however, this may not be the time that the actual cash is received or paid. For example, depreciation rates are excluded from net income because although it is charged as an expense it does not involve a cash outflow.
Cash flow from operations is one of the most closely watched indicators of a company’s performance by many analysts. It makes it easier to see how the company is financially healthy. A large increase in inventory or receivables can result in a sharp drop in cash flow as a sign that the company is unable to sell its product or collect payment for it from its customers.
- Cash Flow from Investing and Financing
Investing activities cash flow is the cash used for or generated while investing such as purchasing additional equipment or investing in other companies’ stock. Cash flow from financing activities comprises money raised through the issuance of stock or the borrowing of money as well as money paid for repayment of loans.
Measuring a Company’s Financial Strength
The price of a company’s stock is dependent on many factors. Nevertheless, companies with good financial performance (increased sales, earnings, net worth and cash flow) do better in the future as their stock price generally rises. Traders who use technical factors heavily can benefit from becoming financially literate since they help spot financially strong or improving companies. It provides the traders’ field with more knowledge to make more informed decisions.
