How to Analyze Financial Statements

How to Analyze Financial Statements
Financial Statements

Look at the company’s current assets. This is anything the company owns that can be converted to cash: Revenue, inventory (although this is subject to depreciation) and money owed to the company. This is a good measure of a company's liquidity.

Consider the company’s current liabilities. These are items that have to be paid: Bills, overhead, employee wages, short term loans. The assets definitely need to outweigh the liabilities; this determines the liquidity of the company. The current ratio is the current assets divided by its current liabilities. The higher this number is the better.

Calculate the long term prospects of the company remaining above water. Take into account bank debt, whether bills are being paid on time, and any socio-economic factors that might impact the industry or field the business is in. Be careful that the company does not have too much debt.

Estimate the profitability of the company for the future. This can be somewhat predicted by looking at the company’s past performance, but don’t depend on past performance alone to make your final judgment. Examine the products and services of the company and study the industry for trends.

Spread your investments around. Pick several different companies to research and compare the net profits of each company. If they are in the same arena, you can try to figure out what one company has that makes it more profitable than another.