How to Analyze Financial Statements? Before Investing In A Company
- Income Statement Analysis
- Balance Sheet Analysis
- Cash Flow Statement Analysis
- Business Income
- Gross Profit Margin
- Operating Expenses
- Net Profit Margin
- Earnings Per Share
- Ensure that revenue is constantly improving over a period of 5 years and more. Revenue growth indicates that businesses are getting more sales and clients.
- Lots of revenue doesn’t mean that company is earning a profit
- General and Administrative
- Research and Development
- Sales and Marketing
- For non-tech companies, high R&D costs will put their long-term economics at risk.
- Strong technology company will usually have high R&D expenses to stay competitive.
- Ensure S&M expenses are in line with revenue growth.
- Current Ratio
- Cash or Cash Equivalent
- Debt to Shareholders Equity Ratio
- Return on Equity
- It is the earnings that are retained in the business.
- Negative retained earnings mean that the company loses more money than it has accumulated.
- Capital Expenditure
- Company Share Buyback
- Free Cash Flow
- Cash Flow from operating activities
- Not having any or minimum capital expenditure in terms of earnings.
- Capital expenditure is the amount of money spent on maintaining or acquiring any fixed assets, such as lands or equipments
- Cash Flow from Investing Operations (There is not much to discuss for value investors POV)
- Cash Flow from financing Activities (There is not much to discuss for value investors POV.)
- Share buyback reduces the number of outstanding shares, which increase the earnings per share (EPs) of the company (which eventually makes the stock price go up)
- Check “Insurance of preferred stock” in the company’s annual report to search for the company’s share buyback.
- It indicates that management takes good care of their business.
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