Looking only at the bottom line of a financial statement is the sole measure that some investors use in order to value a company.
But, its not just whether profits are rising and falling, but how they’re rising and falling!
Companies can easily manipulate their statements to make the overall picture look better than it really is.
So it’s crucial for investors to look not only at the bottom line but at all the lines on the income statement that show how a company got there.
Analyzing those figures and checking them will help uncover operations that are beginning to falter, or zero in on struggling enterprises that are turning around.
The financial statements and their accompanying notes explain a company’s financial performance and recent financial history.
Financial analysts use these statements in several ways:
To evaluate a company’s overall performance, identify strengths and weaknesses, anticipate future successes or problems, and ultimately help them decide if the company is a good investment opportunity.
Annual reports include at least three financial statements:
1. Statement of Earnings:
Summarizes results of the company’s business operations. (Revenue and Expenses)
2. Statement of Financial Position:
Lists the company’s assets and the claims against them. (Liabilities and Stockholders Equity)
3. Statement of Cash Flows:
Measures the flow of cash into and out of the company.
The statements contain the financial information for a publicly held company.
If a company is composed of many subsidiaries, divisions, and other companies, it presents the financial information of all its holdings as one consolidated company representing all the parts of its very large organization.
An annual report is exactly what it sounds like:
A formal report on a company’s performance in the preceding year. A public company produces an annual report for its stockholders, the people and institutions who own the company.
Other interested parties, such as customers and potential investors, read this report, too.
In fact, it is required that a public company must keep stockholders informed regularly on the state of its business.
An annual report is one of the most important documents a company produces and is often the first document someone consults when researching a company.
It reports how the company did financially and often explains the scope of its business mission and management philosophy!
