by Mr. Anil Rego, Right Horizons
Despite few recent reported instances of financial jugglery, fundamental analysts rely hugely on financial statements of a company for efficient stock picking.
For a layman, most of these would be way out of his league.
We do a quick roundup here on key aspects of financial statement analysis.
Financial Statements Analysis:
** Financial statements include profit and loss or / income statement & balance sheet, which depicts the assets & liabilities of the business.These are prepared at the end of a given period of time.
** Many Indian companies have a financial year ending March 31. They are the indicators of profitability & financial soundness of the company.
** The process of analysis is to identify the financial strengths & weaknesses of the firm; the effort also involves establishing meaningful relationship between items of the financial statements (both income statement & balance sheet).
Cash Flow Statement..!
** There is yet another statement called the cash flow statement, which helps us understand the money flow effectively.
** The analysis & interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units.
Financial Highlights..!
** Financial highlights are released for media purposes. This is the summary of company's performance over the period under review.
** One should essentially look at year-on-year data on various parameters like sales, operating profit, net profit, EPS (earnings per share) and share capital. The period could be 5 to 10 years or shorter if the company is young.
** These would also provide insight on product launches, development & market expansion.
Identifying Growth Trend..!:
Whilst investing, the objective is to put your money in a company that is growing consistently.
Often one looks at the top line (revenue) & bottom line (profit after tax or / net profit) growth trend over the past year to assess the company's performance and efficiency.
Other things to look at are, the margins / or operating profit margins & net profit margins to understand the cost efficiency, interest cost, tax effectiveness, any extraordinary items of the Firm.
About the author...!
Anil Rego is CEO at Right Horizons
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