These statements are important. Investors should be able to grasp these statements since they are fundamental in analyzing a business organizations solvency, vitality, and power. This guide will discuss on these significant financial reports, their constituents as well as its role in the determination of the health of a firms financial health.

The Balance Sheet: Understanding Financial Position

Components of the Balance Sheet

Assets are referred to as the wealth of a firm and include cash, inventory, property and equipment among others. Liabilities integrate bank loans, account payables and recognisable financial commitments assumed by the company. Owners equity or shareholders equity is one of the most important components of the balance sheet, which indicates how much the shareholders are invested in the company after all the assets are offset by the liabilities; it can also be referred as net worth of the business. The balance sheet is structured to reflect the accounting equation: This means that Assets are balanced by Liabilities and Equity so that Assets = Liabilities + Equity. This equation constitues the base of the balance sheet and accentuates the balance of the financial power within a company. In a manner that identifies what the business owns and what it owes, the balance sheet gives the financial health image of the business and show the capacity of the business to meet its obligations or to invest in further business opportunities. Due to the clear presentation and organization of the information, the balance sheet can be considered as one of the key documents that helps to evaluate the financial state of any company.

Importance of the Balance Sheet for Investors

It is an important statement that can give essential information for investors about business financial position, the ability to pay and the structure of the capital. The balance sheet therefore enables an investor determine whether the company holds enough assets to fund its liabilities, whether short or long term. They assist in establishing the financial viability of the company and its solvency and liquidity. These ratios give investors a picture of the extent to which the company has been able to control its resources therefore, they help investors to evaluate the efficiency of the use of resources within the same industry or sector. Besides, the knowledge of balance sheet makes it possible for the investor to decipher trends in the growth of the assets, accumulation of liabilities and the changes in the share holders equity that could help in making good investment decisions. Indeed any investor wishing to evaluate the long term prospect and risk of any company will definitely find balance sheet as an essential tool.

Revenue and Expense Breakdown

These include fixed assets, investments, intangible assets, depreciation, and amortization whereby the final figure obtained after all these deductions is the net income or loss, commonly known as the bottom line. The income statement is of great importance because it provides an improved picture of the operational performance as it indicates whether the business is making a profit out of its core business operations. Hence by looking at both the revenues and the different expenses the investor is in a position to understand the areas of strength and areas of weaknesses in terms of costs and revenues of the business in question. This analysis assists in determining how the company is run, and the prospects it has for making continuous, good profits in the future.

Key Profitability Metrics

In particular, the income statement is used to assess the financial performance of the company as it presents the information to be used in calculating its profitability ratios. A gross profit margin above the industry average means that the company is dealing with operating costs proficiently and earning good incremental income in relation to cost of sales. This metric is of most significance in assessing the operational cost control as well as the operating profit realized in the prime business activities. Last of all, using the figure of net income, and considering all kinds of costs both operating and non-operating, it is possible to determine the net profit margin that creates a complete and detailed picture of the organizations profitability. It shows how much profit an organisation makes for each dollar of sales revenue. Altogether, these key financial ratios enable investors to evaluate the organisational efficiency, profitability and sound financial condition and then compare it with the corresponding figures of similar businesses for the purpose of making an intelligent investment decision.

Measuring Company Performance Period

With help of the income statement a manager can evaluate the trends in the companys performance over certain periods, in terms of generating revenues and managing costs and profits. Income statements created from different time periods enable investors to look for trends that will help them to determine the state of the companys financial health as well as its growth. For instance, steady increase in the revenue over a couple of quarters or years can be a good sign showing the market expansion and resultant corporate sales, which a prospective investor wants. On the expense side, understanding how a firm is handling it in relation to its revenue tells the investors whether the company is improving on its efficiency or whether the expenses are catching up with the revenues. Like operating margin, net profit margin, profitability can also be studied over time to see if the company is getting better at the generating the operating profits over its sales and costs of sales. Further, patterns in such values may be used to forecast future results as those businesses that demonstrate year-on-year enhancements in such metrics are likely to be more successful in the long run. In general, the analysis of a companys performance over a certain period enables investors to adjust their expectations and select better performing stocks, as well as to determine whether a particular business model is viable and profitable and whether the businesss prospects are worthy of further investment.

The Cash Flow Statement: Tracking Cash Movements

It is a financial statement that shows the flow of cash within an organization in terms if inflow and outflow within a particular period. However, in another perspective, it gives an understanding of the manner in which a company earns cash from its operations, how the cash is used for investing activities, and how the cash is utilized in the financing activities. Being one of the statements that show financial position, the cash flow statement assists the investors consider the quality of a companys revenues and the quality of its cash generated.

Conclusion

The main rationale why study of financial statements is important in evaluating stocks performance is that an investor has to be armed with knowledge in order to be able to make right investment decisions. The balance sheet gives information about the position of the company, income statement gives information regarding the performance and efficiency of company and cash flow statement informs us about the companys cash position. Combined, these reports provide a detailed snapshot of the business stability, profitability and earning capacity in the prospective investment. Through the evaluation of these statements users are in a better position to draw investment decisions, compare business in an industry, and lastly make effective investment decisions. The concepts are important and vital in the day today financial planning and investment decision in order to attain sustainable financial health.