Today, the blog is on Fundamental Analysis & Financial Statements.
Fundamental Analysis is a form of stock selection discipline. Fundamental analysis is pretty much going through a company’s financial statements and deciding whether a particular company is worth investing in. The Financial Statements will be analysed by means of using various Financial Ratios. Such as Earnings per Share (EPS), Price Earnings Ratio, PE Ratio etc.
A person does not necessarily need to understand or know how to read a Financial Statements but MUST know how to use certain financial ratios, so that appropriate evaluation and sound judgment can be made in deciding whether any particular company should be invested in.
Guide to Financial Statements
What’s in them?
Annual reports include at least three financial statements:
1. Statement of earnings:[ Income Statement] Summarises results of the company’s business operations (revenue and expenses)
2. Statement of financial position:[Balance Sheet] Lists the company’s assets and the claims against them (liabilities and stockholders’ equity)
3. Statement of cash flows: Measures the flow of cash into and out of the company.
The statements contain the financial information for a publicly held company. If a company is composed of many subsidiaries, divisions, and other companies, it presents the financial
Information on all its holdings as one “consolidated” company
Who is responsible for the Financial Statements Preparation?
Every business has an Accounting department and it’s their responsibility in the preparation the Financial Accounts. It’s the coordinating of what occurs on a daily, weekly, monthly basis and using all the information gathered, to prepare various sets of accounting records.
An Accounting department will have various divisions in a hierarchy set structure. The head of the department will be Financial Accountant or Chief accounting officer. They will also have an internal audit department that will make sure that they are following the generally accepted accounting principles (GAAP).
The generally accepted accounting principles (GAAP) help ensures that the financial information reported is reliable and consistent in form with the reports. GAAP also helps safeguard against investor fraud.
The External Auditor’s report.
This report is an examination of the financial records by an independent firm of Chartered Accountants, referred to as Audit. The objective is to ascertain that the Financial Statements have being prepared accurately and reliably. It’s basically assessing the company’s internal accounting controls system, confirmation of assets etc. This obviously has to be complete, reasonable, and prepared inconsistent with the adopted General Accepted Accounting Principles.
At the end of the examination/audit, and if the auditor(s) are certain that the statements show a true and fair picture of the financial position in accordance with the GAPP, they issue a ‘’qualified opinion.’’
Statement of Financial Position
The statements show what a company is worth at a set period of time. The statement details, three main facts:
1. What the company owns
2. What the company owes
3. What belongs to the owners
Assets (what the company owns)
Liabilities (what the company owes)
Stockholders’ equity (what belongs to the owners)
Part of the financial statements is a Balance Sheet; it’s called this name (Balance Sheet) as one part – Assets is in balance with the other two parts, namely Liabilities and Shareholders’ equity.
I will continue from here in the next blog.
Until next time- Keep Believing, Keep Hoping & Keep Loving.