- by Richard Loth
What You Need to Know About Financial Statements (3)
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Non-Financial Statement
Information
Information on the state of the economy,
industry and competitive considerations, market forces, technological change, and the quality of management and the
workforce are not directly reflected in a company's financial statements. Investors need to recognize that
financial statement insights are but one piece, albeit an important one, of the larger investment information
puzzle.
Financial Ratios And
Indicators
The absolute numbers in financial statements are of little value for investment
analysis, which must transform these numbers into meaningful relationships to judge a company's financial
performance and condition. The resulting ratios and indicators must be viewed over extended periods
to reflect trends. Here again, beware of the one-size-fits-all syndrome. Evaluative financial metrics can differ
significantly by industry, company size and stage of development.
Notes To The Financial
Statements
It is difficult for financial
statement numbers to provide the disclosure required by regulatory
authorities. Professional analysts universally agree that a thorough understanding of
the notes to financial
statements is essential in
order to properly evaluate a company's financial condition and performance. As noted by auditors on financial
statements "the accompanying notes are an integral part of these financial statements." Take these noted
comments seriously.
The Auditor's
Report
Prudent investors should only
consider investing in companies with audited financial statements, which are a requirement for all publicly
traded companies. Before digging into a company's financials, the first thing to do is read
the auditor's report. A "clean opinion" provides you with a green light to proceed. Qualifying remarks may be
benign or serious; in the case of the latter, you may not want to proceed.
Consolidated Financial
Statements
Generally, the word "consolidated" appears in the title of a financial statement, as in
a consolidated balance
sheet. Consolidation of a parent company and its majority-owned
(more that 50% ownership or "effective control") subsidiaries means that the combined activities of
separate legal entities are expressed as one economic unit. The presumption is that a consolidation as one
entity is more meaningful than separate statements for different entities.
The financial statement perspectives provided in this overview are meant to give
readers the big picture. With these considerations in mind, beginning investors should be better prepared to cope
with learning the analytical details of discerning the investment qualities reflected in a company's
financials.
Richard Loth has more than 38 years of professional experience
in the financial services sector, including banking, investment consulting and capital markets development,
both internationally and in the U.S. He has worked with Citibank, Fleet National Bank and the Bank of
Montreal. Mr. Loth is currently the managing principal of Mentor Investing, an independent Registered
Investment Adviser based in Eagle, Colorado. Over the years, he has authored several investment education
articles, publications, and books.
Source: http://www.investopedia.com/articles/basics/06/financialreporting.asp
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