When you are investing in the stock market, you need to account for various factors and data from companies that you will be basing your investment decisions on. One of the most important and complex indicators of success of businesses is the financial report. It helps predict further development of the company and decide whether its shares are worth putting your money in.
Companies that do not have their shares traded in the stock market may not reveal their reports to all those who are curious. On demand, they can provide this information to tax authorities or potential investors. However, only public companies must reveal their financial reports fully.
As a rule, reports are published in open sources or on the websites o companies. The reporting period that ends up in a financial report, can be a quarter, six months, or a year. In certain cases, companies provide reports for longer periods for the sake of clearance of analysis.
Types of financial reports
Internationally accepted practice offers several types of standard reports:
- IFRS – International Financial Reporting Standard
- US GAAP – US Generally Accepted Accounting Principles.
The latter standard is used by companies that have their shares traded in US stock markets.
As the name reveals, the IFRS is an international reporting standard. Quite often, the IFRS report is adjusted to the standards of US GAAP for simpler analysis.
Who needs financial report and what for
Tax authorities calculate taxes for the company based on the reports. The information must be absolutely realistic; data that does not reflect the real state of things may not be published.
The management of the company makes decisions about further development of the company based on the reports. They can plan extension of business or, on the contrary, get rid of losing branches to cut down on unnecessary expenses.
Shareholders and investors use the reports to assess the finance of the company, the work of the management, investment perspectives, etc.
Financial reports help future investors decide which company to invest in and what to do with the shares already in the portfolio. Also, the report makes it clear whether the company will pay dividends and how much.
What you can find in a financial report
Profits and losses of the company over the reporting period
- Gross profit
- Operational profit
- Net profit
- Base EPS
Flow of funds
The report accounts for cash and non-cash receipts and payments on all bills, including money flow from investments, operational, and financial activities.
Balance
The report shows the financial performance of the company over the reporting period: the total company value including cash, property, and liabilities.
How to use financial reports
Having studies financial reports of a company or several companies, an investor can carry out a comparative analysis of their business. This is quite a simple thing to do.
First, choose the companies you would like to compare, but make sure they are working in one sector or make similar products. It would be wrong to compare a company that produces heavy metals and an entertainment company. In such a case, comparison will be incorrect for a number of reasons.
Draw a table of the indicators you are interested in. Thus you can assess the perspectives of development and potential profit from investments. As a rule, for comparison previous reports of both companies are taken, and comparative analysis is carried out that, among other things, helps assess potential dividends and the market sustainability of the company.
If the results of a company are disappointing, hold back from investing in it. Promising companies with innovative products can be an exception, but never forget about increased risks.
Which indicators are normally compared?
- Net profit
- Gross profit
- Operational profit
- Base EPS
- Cash flows from all business activities
- Current and non-current assets
- Liabilities, equities, and debts
Where to find financial reports
To check and study a financial report of some company, you can search for it in open sources on the Internet or go directly to the website of the company.
Let us study the example of the report of American Airlines Group. We go to its official website, choose the section For Investors (different companies may have slightly different names for the section).
Choose the financial report for the previous period.
Then you just need to study the information, apply comparison analysis, and see whether this company suits you.
Bottom line
There is no reason for an investor to study the whole of financial report. Reports can contain up to 200 pages and some information meant for a very small number of people.
An optimum way out is to choose several indicators and use only them. Note that you need to study the reports for the previous reporting period. To see the full picture, annual reports are usually used.
When making decisions, investors are often perplexed by impulsive statements or negative news about the company. In this case, it will be safer to act based on digits and facts instead of emotions.
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