Video:3 Financial Documents You Should Know Before Investing

Transcript:3 Financial Documents You Should Know Before Investing

Hi, I’m Victoria, and today for About.com we are going to discuss the three financial documents that you should review in evaluating a company.

Evaluate a Company's Financial Documents Before Investing

When evaluating a company, examining its finances through income statements, balance sheets, and cash flow statements can provide insight into the company’s fiscal strengths and weaknesses.

Income Statements Documents Financial Profits

The income statement measures a company's financial performance over a specific accounting period, and can inform an investor about the sustainability of a company’s net profit. Performance is measured from a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.  The statement also shows the net profit or loss incurred over the accounting period.

Net profit divided by the market price, generates the Price Earnings – or PE ratio – an indicator of how much an investor is willing to pay for a dollar of income. A high PE ratio is a sign of high future income expectation.

The Balance Sheet Documents Net Worth

The Balance Sheet lists the company’s assets and liabilities, the difference of which is listed as the company’s net worth also known as shareholder equity.

The balance sheet is important because it shows how much of the company’s operations are funded from current operations (cash flow, receivables, etc.) versus borrowed money or the sale of stock. This financing structure shows how much of a company’s operations and growth are sustainable.

Cash Flow Documents Income and Expenses

A Cash Flow statement examines a company’s income versus its expenses - and it   can provide an indication of how well a company manages this balance. This is reported quarterly to the SEC and can alert management – and investors – to the need for borrowing arrangements, signal availability of excess funds, the timing feasibility of discretionary programs, and can stimulate general planning.

All of these documents can be found in a company’s prospectus or their quarterly and annual reports, accessible either on the company’s website under their Investor Relations link or by contacting a company’s shareholder services.

Compare Companies' Financial Documents

It is also important to compare these three documents to other companies in the same industry, industry averages, and to research multiple year statements to determine how well the company is managed compared to its peers and historically.

Thanks for watching.  This provided a brief description of these three financial documents, to learn more please visit About.com.