How To Read A Financial Statement

By | February 23, 2019

Learning to read a financial statement is the secret to discovering winning stocks. Ready to begin? Here is where you can start.

How To Read A Financial Statement

Whether you are buying stocks directly or buying them via Mutual Funds, it helps to know the financials of the company you are getting in business with. A financial statement reveals information about a company that is not available to you in plain sight. It also gives you a competitive edge when it comes to picking the winning stocks.

Reading Financial Reports

If you are good with numbers, there is nothing like it. If you are not, it’s time to roll your sleeves up and get to work. Understanding financial statements is not an easy job. It’s a way of finding out what lies behind those numbers and what they mean for the business at large. It takes a lot of time, patience, and curiosity to become an expert.

While financial reports are a good place to start your journey, you need to keep in mind that it’s not a definitive guide to guaranteed returns in the coming year. There is a ton of macro-economic factors that determine a company’s ability to reach its true potential.

Additional Reading: 5 Financial Mistakes To Avoid When You Are Young

How Can They Help You?

Having the ability to read financial statements almost automatically guarantees the fact that you won’t invest in a dubious company. That way, you can safeguard your investments and steer clear of trouble. Will it be beneficial for those investing in Mutual Funds? Yes, they will because once you get the hang of it, you will not have to depend entirely on your fund manager to understand whether your investments are heading the right way.

So, where should you begin?

Annual Report

The annual report is a good place to start since it documents a company’s activities and finances in the previous year. Much of the financial statements you need are already present there. If you dig into an annual report, you will come across overwhelming details about the way the company functions. For instance, a mere glance into the annual report of a BSE Top 100 company will tell you all about the management’s current and future outlook, its investments, its losses & gains and a host of other information that will give you a clear picture of how the company has performed in the last year.

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Balance Sheet

A balance sheet consists of three key areas – assets, liabilities and stockholder’s equities. The balance sheet is a snapshot of the company’s performance until the date specified. It allows you to see what the company owns and how much it owes to its creditors.

  • Assets

Assets are the resources that a company owns. They involve things that have been acquired through transactions and have a future value that can be expressed in terms of rupee.

Assets are mainly of two types – current assets and non-current assets.

Current assets are the ones that are expected to be used up within a time span of 1 year. Inventory, prepaid expenses, cash and cash equivalent, accounts receivable etc. are some of the common items you would notice under the current assets tab in a balance sheet.

Non-current assets or long-term assets are the ones that are expected to bring in long-term value for the company. Tangible fixed assets, intangible fixed assets, goodwill etc. are some of the common items under non-current assets.

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  • Liabilities

Liabilities are obligations that the company owes to its creditors. Like assets, liabilities too can be short-term and long-term. Short-term liabilities or current liabilities are the dues that need to be repaid within one year while long-term liabilities are the ones that have a longer repayment cycle.

  • Shareholders’ Equity

Shareholders’ equity is the value or the net-worth of the business after all the obligations are met. Only the owners of the company can claim this amount.

Profit & Loss Statement

Plainly put, the profit & loss statement tells you bluntly whether a company is making profits or whether it is running into losses. Even if you have no clue about how a P&L statement functions, a customary glance over the ‘net profit’ section will making things amply clear before you. Read each of the sections carefully to understand where the company is spending its money and how it is recovering those costs.

Cash Flow Statement

A cash flow statement shows how changes in balance sheet accounts and income affect cash and cash equivalents. For beginners, it may be quite difficult to understand how the cash flow statement actually works. But, don’t fret. Begin with the balance sheet, make friends with the income statement, and as you begin to enjoy it, move on to things that require deeper analysis like financial ratios and cash flow statement.

Ready to begin your investment journey?

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