Scanning the financial results
February 6, 2008
It's that time of the year when quarterly reports flood mailboxes and newspapers. Chances are that you'll ignore them. But with the markets resembling a yo-yo, and everyone saying it's a good time to buy, these reports may help you pick up a good stock. Company reports are easily accessible online.
All you really need to know is what to look for. There is lots in a company report to understand if the company stock is a good buy. We identify some basic numbers for the beginners, across three main sections of a report.
1. Profit and loss account
This is not the company balance sheet. As the name suggests, it tells you how much profit or loss the company has made in the given time period with a summary of it's revenues, costs and expenses.
2. Cash flows
Cash flow indicates a company's financial strength. It tells you how much cash came into the company, where it came from, how much was used and for what. The greater the amount of free cash, the greater the company's chances to expand, pay dividends, repay debt or buy-back stocks.
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
3. Balance sheet
Tells you what the company owns, what it owes and shareholder's equity. It's called a balance sheet because assets and liabilities must even out
Keep in mind
Words like "write-offs", "charge-offs" and "one-time charge" generally mean that the money was spent on something that is no longer useful
Always read the footnotes to financial statements. Much of the truth about a company's health is buried here
Compare the results with companies in the same industry
Neither balance sheet nor profit and loss account or cash flow is better than the other. All three should be understood to get a complete picture of a company's finances