Investors often depend in evaluating any investment or financial stock on its performance in the stock market, up or down over a period Short of time. Note that this evaluation does not necessarily reflect the actual performance of the company, but rather it may be the result of external events such as decline Interest rates, unexpected indicators of unemployment, a temporary recession or speculation to collect profits and withdraw liquidity.
Previous events affect the market value of the stock and undoubtedly overlook the true value of the investment, the future of the company, or credit risk Bankruptcy of the investor.
But what distinguishes the expert investor from others is his reading of the annual financial statements of the target company, to analyze the strengths and weaknesses of the company Its financial performance and sensing any potential credit risk or upcoming liquidity crisis.
Here we review the basic financial statements for each company and the information available in each of them and how to analyze them in order to arrive at the required information.
Every company listed on the stock market is required to issue financial statements for the past year’s business.
The preparation of these lists is the responsibility of the company’s management and are subject to audit by an independent accounting firm to express an opinion on the correctness and objectivity of the data.
These lists are:
Balance sheet notes
Income statement
Cash flow statement
Statement of owners’ equity
Balance sheet notes:
This list shows the assets and liabilities of the facility at a specific date in time, usually the last day of the calendar year 12/31 / 2xxx.
These assets include: cash, debts to customers, inventory value and fixed assets.
While liabilities include: short-term debts, bank loans, rights of suppliers and employees, taxes owed to the government, and of course rights. Partners and investors which is called capital.
And for a correct reading of the final budget, we need the actual numbers for the last two years and also the numbers of a competing company or the ideal proportions for the sector In which the company is active.
Example:
The following data are extracted from the final balance sheet for the last two fiscal years of the company under study compared to a competitor and indicators The sector in general
On a quick reading we conclude the following:
The target company witnessed a decrease in cash liquidity compared to the previous year and the liquidity ratio was less than the competitor and the sector in general.
An increase in the customers’ balance, which is explained by the difficulty in collecting the company’s debts and converting them into cash.
A slight decrease in the value of fixed assets, which is explained as the depreciation of some of the company’s assets without compensation or the sale of part of them.
An increase in the percentage of short-term debt as a result of its use in financing, but at a smaller rate than the competitor and the sector in general.
We conclude from the above that the company has a debt collection problem, which will negatively affect operating financing
Income Statement:
This list displays the financial and operating activity of the company during a specified period of time (often a fiscal year) and mainly shows revenues Company, operating costs, gross and net profits.
And to know the direction of the company’s revenues and profitability, we basically need to provide the income statement for the last three years and compare it with a competing company. Or with the actual percentages of the sector in which the company operates.
example:
The following data shows the income statement of the target company for the last three years compared to the competitor and the sector in general
The list shows a continuous decline in the company’s revenues and profits compared to the competitor despite the sector’s growth of 3%.
Cash flow statement:
This list shows the real sources of cash that the company obtained and its use during a specific period of time (Often a calendar year), and it mainly shows the operational, investment and financing liquidity.
From the foregoing, we conclude that the company obtained financing as loans and debts from suppliers compared to competitors who obtained financing from the activity. The main company
Statement of owners’ equity:
The change in the capital structure appears in terms of the change in the shares of investors and partners and the actual dividends.
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