May 5, 2023
For today’s retail shareholders, information about publicly traded companies is plentiful. This avalanche of information is a blessing and a curse for individual investors. On one hand, it gives shareholders an incredible amount of information that they can use to make investment decisions. On the other, it can feel like information overload.
So what documents are worth studying when considering investment opportunities? At a minimum, many financial experts suggest looking at the following financial statements to get a glimpse at the health of an investment: the balance sheet, cash flow statement and income statement. Additional documents worth perusing are the company’s quarterly and annual reports.
Here's what experts suggest looking for in the aforementioned documents, all of which are easily accessible for public companies:
Balance Sheet: The balance sheet includes the assets owned and the liabilities owed by the company. According to Investopedia, the strength of a company's balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital or short-term liquidity, asset performance and capitalization structure (the amount of debt versus equity that a company has on its balance sheet).
Cash Flow Statement: Cash flow statements spell out how much cash a company has, how much it’s taking in and how much it’s spending. It is different from an income statement. An income statement records revenue while a cash flow statement outlines how much money the company has free to run the business and how it is using that cash. A cash flow statement has three parts – Cash Flow from Operating Activities, Cash Flow from Investing Activities and Cash Flow from Financing Activities.
Income Statement: Last, but certainly not least is the income statement. As mentioned in the cash flow statement section, the income statement, also known as a profit and loss (P&L) statement, summarizes all income and expenses over a given period, including the cumulative impact of revenue, gain, expense and loss transactions. It is different from the balance sheet since the income statement compiles income and expenses while a balance sheet records assets, liabilities and equity.
Retail shareholders can find all of this and much more in a company’s quarterly and annual report filings.
A quarterly earnings report is a mandatory filing made by public companies every three months to report on their financial performance over the period. Quarterly earnings reports are summaries of the company’s financial statements. All publicly traded companies must file their quarterly reports on Form 10-Q with the Securities Exchange Commission (SEC). What’s included in a quarterly report varies from company to company, but in general, they include an
executive summary, goals and objectives, and highlights and issues the company may be facing.
An annual financial report includes all the above information from the quarterly reports along with detailed information about the market the company competes in, executive compensation, a detailed review of the company’s assets and liabilities and much, much more.
Taking the time to review these documents and comparing them to other companies in the industry can help individual shareholders make sound investment decisions. Taken together, they form a fairly complete financial puzzle for the retail investor.
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