There are still many investors who decide to buy stocks without studying the financial statements because of variety of reasons, such as don’t know where to start, too complicated or take quite a long time to study that they may miss the golden opportunity to make a profit. So many investors continue to buy stocks by looking at just the price and just with emotion or the advice of friends.
However, the investment to be successful in the long run, financial statements are important information that reflects the financial position and security of the business. This is beneficial to investor decisions.
Warren Buffett, although he succeeded with the investment. But he still reads financial statements himself. He said, "Investors need to understand the financial statements. Must understand the little things in the financial statements if you do not understand. Unread and unspecified financial statements. Do not buy stocks. "
For investors who still look at the financial statements as a document that filled with complicated numbers and do not know where to start. Do not be discouraged! It takes a little while to understand and there is a technique to read simple financial statements and decide how financially healthy a company is and is it interesting to invest?
Financial statement tells us what the status or wealth of a company is.
If the company has a strong financial structure, will allow business to continue to grow in the long term.
Assets = liabilities + shareholders' equity (capital)
The first thing to look at is asset list and assets are sorted by liquidity.
So, cash will show on the first line. It has the highest liquidity and can be used immediately. This means company must have assets that can be converted into cash immediately or may be cash.
Asset Information initially, we will know the size of the business, growth, changes in asset investment structure.
Next, look at the liabilities. The main liabilities are current liabilities and non-current liabilities. This information will show financial liquidity. The company should have assets like cash or receivables more than short-term debt. That means including assets and liabilities, asset side should be more.
Finally, look at the shareholders' equity and retained earnings. It represents the investment since its inception, combined with the net profit generated from its establishment to date. If the company has high earnings, it will show its ability to do business well, efficiently and can pay dividends to shareholders. It also used to check the security of the company as well by using D / E Ratio
D/E Ratio = Total liabilities
If the D / E ratio is high, like 4x, 6x, 10x, etc., it shows that the company has borrowed debt to run business too much. Investors should be careful because there may be liquidity problems or net losses in the future. So, this ratio is "the lower the better", which should generally not exceed 2x.
Statement of Comprehensive Income, shows how good the company can do business, is there any chance of growth in the future? And is it possible to compete with competitors?
3. Cash Flow Statement
Cash Flow Statement, how much liquidity does business have? Where are the sources of funding? And how money invested. Overall means seeing the ability to plan. This information is relevant to the operation, investment and financing.
Statement of Cash Flows Initially, the behavior of acquisition and use of funds. If the company uses the money efficiently, it will make sure that the company will grow in the long run.
Financial Ratios, before you decide to invest in stocks, must analyze the financial ratio. Because it is a financial assessment and profitability. Usually, must be compared to competitors in the same business to know that how different each company has its advantages and disadvantages.
This is just a preview of the financial statements. If you want to be a successful long-term investor, learn deep down in detail. It’s important to monitor data regularly. Financial statements are important information that reflects the company's financial position and security. It is beneficial to invest.