If you are planning to own equity in one of your favorite companies, you might want to think again before going in headfirst.
Examining your favorite company’s performance shouldn't be too hard if you take the following into consideration:
The annual report
At the end of every financial year, companies are bound to publish their annual report: a public document which serves as a primary source for investors to gain insight on the company’s financial situation, as well as to understand in which direction the company is heading.
The company’s leadership will make or break their performance.
Understand who is in charge and how their profile and skillset will push the company towards new heights.
You will soon find that there are some CEO’s who you would go to war with, and some who you will want to stay clear of (depending of course, of your preferred style of leadership).
Vision, strategy, and execution:
Figure out what is the company’s vision for the future, if their goals are attainable and suitable withing the industry they’re operating in.
Make sure to keep in mind how their competitors are doing and how are approaching the same issues.
Accomplishments, financial statements, and risk:
Part of the annual report will act as a window into the company’s financial health and tell you how far they have come since the last financial year.
As for their financial statements, it is vital that investors and entrepreneurs understand the financial health of a company.
By doing so, they will easily be able to identify opportunities while avoiding unnecessary risk.
In order to achieve this task, the key factors investors need to know how to read in the company’s financial statement are:
The Balance Sheet:
In simple terms, the balance sheet is a snapshot of their performance at a given point in time and determines the company’s book value.
It conveys what is known as the fundamental account equation where Assets are equal to the sum of the company’s Liabilities and the Owners’ Equity.
The Income Statement:
Also known as a Profit and Loss (P&L) Statement, this handy report will tell you the company’s whole story (or at least the financial) as it conveniently summarizes, for a set period in time, their income and expenses, all while taking into consideration the impact which gains, revenue, company expenses and losses, have altogether.
By reading the Profit and Loss Statement, you’ll be able to get the full picture in terms of the company’s value and efficiency.
From there, you can and figure out everything from just how well their business is doing (especially when compared to expectations) to their cash flow and balance sheet and, presumably, try to predict the company’s future trajectory.
The Cash Flow Statement:
Never overlook a company’s cash flow statement as it will be a clear indicator on how well the company operates on the short and long term, depending on how much cash they have at hand.
These statements are often divided into three separate sections: Cash from operating, from financing, and from investing activities.
It is important to keep in mind that cash flow doesn’t translate directly into profit.
Other things to consider:
Analyzing a company’s annual or even earnings report is a necessary endeavor if you are planning to invest in it.
However, it shouldn’t be taken as a tunnel vision exercise as there are external factors to keep in mind such as their competitors, the sector and industry in which they operate in, the macroeconomic conditions surrounding them, as always, their actual stock technical analysis in relation to your trading goals.
Remember that one of the main points the annual report, is to galvanize new investors so it might be polished as to achieve its goal, so your own critical assessment is key here.
“You get what you pay for.”
If after going through their reports, you find out that your company is doing well, then the answer to this article’s initial question may be a solid “yes!”.
But, on the other hand, if you dug deep into their financials and found out that there might be other companies in which your money has more room to run, then don’t let your heart fool you, as investing performance, more often than not, comes down to logic and reason.
As actor Bill Nighy as once said: “As you get older you feel you need to pay more attention to what is around you and relish it. I'm greedy for beauty.”
So, worry not and believe us when we say that paying attention to a company’s financial statements and finding a gem on your own is, in fact, a thing of beauty, even if it is not a company you deeply care about.