Financial Statement Analysis 

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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

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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