How to evaluate and analyse corporate financial statements before investing in stocks
A very common piece of investing advice is that you should conduct your own research and analysis instead of fully relying on somebody else’s recommendations. But how do you do this? When it comes to investing in stocks, the key is to evaluate and analyse the financial statements of the company you are looking at.
Companies in India, the US, and most major economies around the world follow what are known as Generally Accepted Accounting Principles (GAAP) to create and maintain their financial records. This involves three crucial statements — the income statement, balance sheet, and cash flow statement.
On the basis of the data in these vital financial statements, you can conduct three essential types of analysis to better understand the relevant company’s performance and value: vertical analysis, horizontal analysis, and ratio analysis. In this article, we’ll present the basics of how you, as an investor, can begin analysing companies so as to make informed decisions.
Let’s take a quick look at what the three statements mentioned above are, what exactly they convey, and what you should focus on when you examine them.
Income statement
When you’re potentially interested in investing in a company, perhaps the first few financial data points you will want to know are its revenue and profit. And it’s precisely this information that you are going to find in the income statement, also known as the profit and loss statement. The revenue, costs, gross profit, operating profit, and net income are some of the key elements in an income statement that you should examine closely.
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Balance sheet
A balance sheet is a
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