A skill
to cognize the economic health of a company is an essential ability for
aspiring businessmen, managers, and investors to instill. Decked with this
information, investors can acknowledge better opportunities while avoiding risks
and entrepreneurs can make more strategic business decisions. Financial
statements offer an insight into the health of a company. Hence, every business
professional should read and understand these documents. If you are new to this
field, this guide will help you read and understand a company’s financial
statement.
Understanding Financial
Statements
A
company’s financial statements include Balance Sheets, Income Statements, Cash
Flow Statements, and Yearly Reports.
1. How
to Read a Balance Sheet?
A
balance sheet is called the book value of a company. It showcases the resources
available and how they were financed on a particular date. It displays the
assets, liabilities, and owner’s equity of the company. According to the
equation: Assets = Owner’s Equity + Liabilities
Assets
are things owned by a company with measurable value. Liabilities are money owed
to the debtors, such as rent, taxes, payroll expenditure. The owner’s equity is
the net worth of the company.
You need
to assess income and cash flow statements to understand the company’s financial
position.
2. How
to read an Income Statement?
Also
called the Profit and Loss Statement, the income statement has the aggregate
effect of income, gain, expense, and loss transactions for a time. It can be
quarterly or annually, showcasing fiscal trends, revenue, and expenditure and
comparisons over a period. Income Statements include:
·
Revenue:
Money that comes in.
· Expenses:
Money that is spent.
·
Cost
of Goods Sold: Cost involved in making a sale.
·
Gross
Profit: Revenue minus COGS
·
Operating
Income: GP minus Operating expenses
·
Income
before taxes: Operating income minus operating expenditure
·
Net
Income: Income less tax
·
Earnings
per share: Net income divided by the number of outstanding shares
·
Depreciation:
Loss value over time on assets
·
EBITDA:
Earnings before Interest, Taxes, Depreciation, and Amortization.
It informs how well the company is doing and determines the financial trends.
3. How
to Read a Cash Flow Statement?
A cash
flow statement offers information on the cash transactions in a business in an
accounting period. It showcases a company’s ability to run in the short and
long term. It has three sections: Cash flow from operating activities,
financing activities, and investing activities.
Operating
activities include cash generated after the company delivers its goods and
services. Financial activities showcase cash flow from both debt and equity
financing. Investing activities include cash flow from the purchase and sale of
assets.
Cash
flow is the flow of cash in and out of a company and is used to make financial
decisions. A positive cash flow states the financial stability of a company and
its ability to expand.
4. How
to Read an Annual Report?
An
annual report is published annually by public corporations to demonstrate their
financial and operational situations. It offers the investors, shareholders and
employees a better knowledge about the goals and objectives of the company. It includes
review of financial data, income statements, balance sheets as well as cash
flow statements.
It
offers industry apprehensions, management discussions, investor information,
and accounting policies.
Critical analysis
Assessing
and understanding the fiscal documents can offer you deep insights about a
company, like
·
Its
debts and how it can repay them
·
Profit
and losses for an accounting period
·
Whether
the yield has increased or decreased
·
Investment
needed for expansion
·
Operational
expenses in comparison to the revenue
As an
entrepreneur, investor, shareholder, employee, or accountant, you should be
aware of your company’s financial health.
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