What are financial statements?
In the world of investing, one of the most valuable resources is a company’s “financial statements.” They give you an accurate, data-backed picture of a company’s financial health for a given period. From this data, you can analyze whether a stock is a good buy or not. Financial statements are to an investor what Vogue magazine is to a fashion connoisseur.
Financial statements, which are issued quarterly or annually, contain valuable information about a company’s financial performance, its current fiscal conditions, as well as its cash flows—all of which are indicators of how a company is performing.
In an age of fake news and misinformation, you may be wondering, “How can I know if the financial statements are accurate?” For your peace of mind, financial statements pass under the scrutiny of government agencies, firms, and accountants, all of whom check and ensure that information is correct.
Examples of Financial Statements (and What Each Means for Investors Like You)
There are at least three general types of financial statements: income statements, balance sheets, and statements of cash flow. Each provides the details of a company’s financial health, and each has a role in helping you make sound investment decisions.
- Income Statement – Also known as the profit and loss statement, the income statement shows the company’s income, expenditures, as well as the profits and losses incurred during a specific term.
Let’s say you bought some stocks at Company X. As an investor, you can access the company’s income statement so you can see how profitable it is. Armed with this information, you can then analyze the trends to determine whether Company X will grow and become valuable in the future, yielding you a positive return.
- Balance Sheet – Also known as the statement of financial position, a balance sheet gives you an overview of the company’s assets, liabilities, as well as stockholders’ equity at a single moment in time. In other words, a balance sheet offers you a snapshot of a company’s financial health for a specific point in time.
Let’s go back to our fictional company, Company X. After you’re convinced that Company X will yield you a positive return, you buy more stocks. Now you want proof of how the company is growing, and how it’s financing its operations and distributing the business profit to its owners. For this purpose, you can use Company X’s balance sheet, which can help you evaluate its value to your growing portfolio. It shows you exactly how the business is using and managing its resources, as well as how much of its assets are maintained by debt or shareholder investments.
- Cash Flow Statement – It’s a universally-accepted truth that successfully operating a business requires skillful management of its cash flow. As an investor, you’ll want access to this information, which is where the cash flow statement comes in. It summarizes the changes in the balance sheet accounts and how these changes affect the cash account during a specific period.
As an investor at Company X, you’d want to know what transactions affected the company’s cash accounts, and how effectively and efficiently they use their cash to finance their operations as well as expansions. In other words, the cash flow statement tells you if the company you’re investing in is financially sound.
Financial statements are helpful resources that are readily available to you. When you’ve got everything laid out in front of you, you are more capable of making better decisions, making investing less of a headache, and more—dare we say it—fun.