As I explained briefly in my introductory post, my background is primarily in financial statement analysis. So, it goes without saying that I would like to attempt to get you interested in the subject to make the reading in chapter 3 easier and more useful. Moreover, fundamental analysis (an overview and understanding of the company’s financial statements, which represents the Company’s performance) is needed for sound investment and credit decision making.
Let’s start with the basics. A company’s story is told primarily in three pieces of paper, the income statement (how is the company doing? How much in sales, how much in expenses and what’s the bottom line?) The cash flow statement (remember, the income statement is an accounting statement. The cash flow statement will show how much cash comes in and goes out of the company through what activities) and the balance sheet (it shows the company’s financial position for a certain date. For example on December 31, 2019 Company X has this much in assets, liabilities and net worth).
Now, I want you to take a look at a certain company and tell me what you see. Simply copy and paste this link https://www.sec.gov/ix?doc=/Archives/edgar/data/27996/000002799620000022/a2019123110-k.htm#s5466E8410BAF4053D0C7046D1F9FD9E2 (Links to an external site.)in your browser, which shows the company’s financial statements. If you scroll down just a little, on the top of the filling you see a the title “item 6, selected financial data”. Click on that and it will take you to a page in the document that summarizes the company’s financial information for the last 5 years. Take a look at it and see if you can understand the development of this company. Seems hard? Not really. First understand what the company does and the rest comes easy to you. Read the business description, they are primarily in the business of creating bank checks. Now, does it sound like a booming industry when credit and debit transactions taking over the world and cash and check are becoming irrelevant? Now take a look at the same financial information and see if you can uncover some clues about this company’s performance over the years. Pay attention to revenue, debt, orders taken, etc.
The best part of the financial statement analysis is that the company is required to tell you by law how it has performed and why. Simply take a look at page 23 of the same document under “Management Discussion & Analysis…” and “Executive Overview” and tell me what management is telling you about this company’s performance.
Don’t get confused. Small steps, ask questions if there are parts you don’t understand. What does the company do, what is your impression of its financial figures and what are the management’s explanations? Don’t be afraid to give me your interpretation of the numbers, I will point you in the right direction if you are wrong. It will help you extremely to read chapters 2 & 3 as soon as possible.