Understanding corporate financial results is not difficult, but it does take some knowledge of accounting terminology and keeping a few basic corporate finance concepts in mind. Ninety-nine percent of the information one needs to assess a public company's finances before investing can be found in their financial statement, which by law must be produced quarterly and annually. Earnings, of course, are the ultimate gauge of corporate performance, but how a company achieved those earnings and future prospects for earnings are also key questions.
Understanding a Financial Statement
Read the balance sheet section of the financial statement. The balance sheet sheet details the basic performance metrics of the company for the reporting period including gross income and total expenses, and eventually brings the numbers down to the bottom line of net earnings for the period. The income report section of a financial statement details all of the gross income as well as offsetting expenses and allowances. The cash flow statement breaks down all the cash inflows and outlays during the reporting period, and the bottom line here is the final cash balance.
Get a Grip on Earnings per Share (EPS)
Just having the final dollar figure for net earnings does not tell investors a lot about financial performance unless they have something to compare it to to, so the final section of the income report of a financial statement will express the earnings for the period as the net earnings for each share outstanding for that particular company (EPS).
For example, say company A earned $2,000,000 last quarter, but only $1,800,000 this quarter. Assuming company A has 1 million outstanding shares then their EPS slipped from $2.00 last quarter to $1.80 this quarter.
Examine the income report and cash flow statement of the financial statement to identify one-time items or charges. Sometimes a company will have one-time items or charges (such as a legal settlement etc.) that negatively impact or positively inflate the earnings for that quarter. So investors want to make sure to carefully examine the income report and cash flow statement to fully understand the results for any given period and make sure that the results are repeatable if good or understandable if poor.
For more on corporate finances and understanding financial statements see:
Financial Statement Analysis – How to Read a Financial Statement
Financial Statements – Non-Profit Financial Statement Analysis
Accounting Standards–US & International Accounting–GAAP & IFRS
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Clayton Browne - Clayton Browne has a BA and an MS in Anthropology, and has been writing professionally since 1994. He worked for many years in both ...
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