3 major financial statements

Does the word 'Stock' sounds familiar to you? I am pretty sure that you guys hear this word before maybe from your friends, family, social media, mass media and so on. But anyway, let me give you a simple explain about what is stock. Stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation and it is also a type of investment that represent the ownership share in company. Always hear your friends talking about how much profits they have earned form stock and you want to give it a try? Want to increase your income by investing in stock but don't know which stock should you buy? Already have a trading account but don't know how to analyze which stock have the better prospect to grow? So, today I wanna share a simple tip on how to analyze a stock by using financial statements.

3 type of financial statements :

• Income Statement

Picture above is one of the example of income statement. Actually, income statement also known as Profit and Loss statement and it has many kind of format so you may see different type of income statement because different kind of company require different format. But all the income statement show the same thing regardless of what format they use. Income statement will show the company's financial performance in term of net profit or loss over a specified period. There are two main elements inside the statement are revenue and expenses. Operating revenue is the revenue that company gains from primary activities which means the revenue achieved from the sales of product. Cost of goods sold (COGS) is the cost of producing the goods sold by company and it contain the cost of the materials and labor directly used to create the goods. We will get the gross profits after sales minus COGS and it will show how much profits a company make after deducting the entire cost of making and selling its products. Non-operating revenue is the revenue realized via secondary or non-core business activities such as: interest, rental and so on. Similarly, non-operating expenses is the expenses realized through non-core business activities like interest loan, depreciation, utilities. We will get net profit after we use gross profit plus non-operating revenue and minus non-operating expenses. Net profit is the actual profits left over after paying all working expenses. The most important thing we have to consider is the net profit of a company because it show whether the business is profitable or not. Apart from that, we also have to compare the net profit of company year by year or compare with others company to make sure our decision is correct. We also can calculate the average growth rate of profit in order to gain better understanding of company earning potential.

• Balance Sheet

 

Balance sheet is a financial statement that display a company's assets, liabilities and shareholders' equity at a specific period and it also provide information on what the company is worth from a book value perspective. The balance sheet contain three main components that are assets, liabilities and shareholders equity and all accounts will be categorized into these three component in order to show the company's financial position. The balance sheet is based on the fundamental equation: (Assets = Liabilities + Shareholders' equity). Meaning to say that, the total amount of assets must be the same with the total amount of liabilities plus shareholders' equity. This is because a company has to pay for all the things it owns by either borrowing money(liabilities) or take the money from the investors(shareholders' equity). For instance, a company take outs a five years, $5000 loan from bank, its assets(cash account) will increase $5000. Its liabilities(long term debt account) will also increase $5000, the two side must be the same amount. Assets can be divided into two types that are current assets and fixed assets. Current assets are assets that expected to be used and converted into cash within one year. Current assets are more liquidity than fixed assets cause it can be converted into cash to pay ongoing operation expenses. Example of current assets are: inventory, cash, account receivable and more. Fixed assets are long term tangible assets that a company own and uses in daily operation to generate income, it could be property, plant and equipment. Example of fixed assets are land, buildings, machine. Similarly, there are also two kind of liability. Short term liabilities(current liabilities) refer to financial obligation that have to be paid within one year such as account payable, accrued expenses. Long term liabilities(noncurrent liabilities) refer to financial obligation that won't be paid in the current year or it is a debt that is not due in within a year. Example of  long term liabilities are loans, bonds payable, pension liabilities. Shareholders equity is the amount of money that invested in a business. So, from the balance sheet we can know that whether company have enough cash to pay off the short term debts or not. And also we can know liquidity ratio, solvency ratio, market value ratio by using certain formula.

• Cash flow statement

 Cash flow statement is the financial statement that show the amount of money entering and leaving a company and it also used to measure how well a company manages its cash position. There are three main activities inside the statement: operating activities, investing activities and financing activities. Only activities that involve cash will be categorized in this statement. This statement is a bit different from income statement in recording revenue and expenses item because cash flow statement record revenue and expenses only when company receive or pay the cash whereas income statement record revenue and expenses when the service given or received regardless of company receive or pay the cash or not. For example, ABC company sold the goods to DEF company but DEF company hasn't pay to ABC company yet. So in this case, ABC company will record its revenue in income statement because the service or the obligation have done but it won't record in cash flow statement because ABC company hasn't receive cash yet. Operating activities means the amount of cash generated by the regular operating activities of a business within a specific period. For example: taxes, interest payment, sales receipts. After that, we will get the net cash flow from operating activities and it could be positive or negative value. If the value is positive which mean the business gain income(cash) after deducting all the regular activities expenses(cash). So we as an investor have to make sure that business always have positive net cash flow from operating activities to show that company is profitable in their regular operating  activities. Financing activities will show the movement of cash between a company and its owners, investors and creditor and it also show the net flow of fund used to run the company. Example of financing activities: issuing bonds, repayment of loan, sale of treasury stock and redemption of bonds. A positive number from financing activities mean more money is flowing into company than flowing out. Investing activities show the cash generated or spent to investment activities such as: purchase of fixed assets, purchase of investment stock/ securities and lending money. After we got all the net cash flow from operating, financing and investing activities then just use some simple math plus minus and we will get net cash flow of the company. For me, I think the most important thing we have to consider in cash flow statement is the net cash flow from operating activities cause it show the regular operating activities profitable or not. Apart from that, there are also many others useful information we can get inside cash flow statement.

These are the three major financial statement that usually used by investor when they wanna invest. Except these three financial statement, there are still many ways we can use when we wanna find a good stock. Maybe financial ratio, valuation, technical analysis and many more. Today I just give a simple introduction about the financial statement but if you wanna further your study in investing you can go for some short course or find a mentor. Invest in our brain first then only we invest in stock because education is indispensable in investing. Do let me remind you investing has its own risk as well, you can't always get profits from it, so please learn first before you invest.