Financial Statement Analysis
The basic premise of financial statement analysis is to examine a
company’s performance to either identify an investment opportunity
or avoid an investment disaster. A company’s stock price generally
is influenced primarily by the company’s performance. The
benefits from financial statement analysis are numerous. You can
* Analyze a company’s historical earnings to project future
earnings.
* Compare a company’s historical earnings with those of its
peer companies in an industry to identify superior or inferior
performance.
* Analyze a company’s historical earnings over a certain period
to identify weaknesses in performance or other problems.
* Use the company’s historical data to project future rates of
return.
* Assess the likelihood of a company’s capability to meet its
financial obligations.
* Analyze a company’s financial statements to gather information
needed for the stock valuation models.
Sources of Corporate Information
You can find much of the information you want to know about a
company in its financial statements and filings with the Securities
and Exchange Commission (SEC). Public companies with more than
$10 million in assets and more than 500 shareholders must file their
financial documents electronically with the SEC. You can obtain
these filings for free from a company’s Web site, by requesting them
directly from a company’s investor relations department or from the
SEC’s Edgar Web site at www.sec.gov/edgar.
The Form 10-K report provides the most comprehensive information
about a company. The report includes a complete set of
financial statements (audited three-year comparative income and
cash flow statements and comparative year-end balance sheets),
along with notes to the financial statements. A careful reading of
the notes often provides crucial information that can affect the
company’s operations. The 10-K is more comprehensive than the
annual report, which is sent to shareholders of record. Companies
might emphasize pro forma financial results that exclude certain
expenses. These “as if” financial results do not conform to generally
accepted accounting principles (GAAP). GAAP are the rules and
guidelines used by accountants in the preparation of financial
statements.
You also can obtain information about a company by listening
to the company’s conference calls when they announce quarterly
or annual earnings and make other announcements.
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