The Role of Financial Statement Analysis in Making Investment Decision

Financial statement analysis is acute in making actual stock ability decisions. It is the individual documents that reflect the historic monetary information of the company. It also records the resources, problems and expenses made by the company previously. If you do not research your funds, you really are involved in an adored gambling. A financial declaration of a company provides a process to present its financial health to partners, shareholders, public and creditors. It helps the financier to create the monetary strengths, weakness and analyze the company in making investments.

  • The major purpose of the financial report is to provide suitable evidence in an identical format for taking crucial economic decisions.

  • Generally in a company, these statements are undertaken by accountants. These financial statements are the record of activities done by the company, but do not offer any appraisal.

  • The stock price of a company depends upon the financial reports submitted at the year end. Investors look at your financial reports while investing in your company. So, keep your reports up to date. The fluctuation of share value depends on the changes in the reports.

  • Many analysts calculate the economic ratios by assuming the information provided in the financial reports. This can affect the investments made for your company.

  • The financing decision and interest rates on a business will be affected due to financial reports. If you apply for a loan then banks and lenders will have a look at your financial reports.

  • Usually, banks and lenders want to invest in businesses that have a good financial background. It may affect negatively if you don’t maintain proper financial reports.

  • It will definitely impact the new investors and lenders. Whenever you want to increase or decrease the stock value, you have to submit the financial statements to potential investors.

  • Investors take decisions by calculating the financial reports and sales revenues, for example if a leading company has sales revenue of $33.4 with net income of 2.6 and another company having sales revenue of $13.7 with net income of 1.8., Then use return on sales ratios to calculate the returns in percentage. By calculating the amounts, first one is having 7.78% and the second one with 13.13%. So, the investments will be done on a company with the calculation of returns. It doesn’t depend on the sales of a company.

  • The above calculations are done using financial statements. So, before investing or financing people will perform a crosscheck analysis of relative financial reports.

  • External users depend on publicly obtainable evidence to perform financial analysis. Such information is provided only through financial reports.

Generally financial statements are of four types:

  • Balance Sheet:It describes the financial position of a company at a certain point of time.

    Income Statement:It describes the primary measure of business, proceeds less outlay during the accounting period.

    Statement of Owner’s Equity: It describes about a separate report of retained earnings. It identifies the name of the individual, and a unit of measure used in the report.

  • Statement of Cash Flows:In a typical business, this report is used to describe cash inflows and outflows.

These are the four reports you have to submit periodically to improve your marketing. Investors will go through these reports at the time of investment.

Written by Maria, a writer working for ppi claims. She has been researching on financial products like loans, insurance claims and investments etc.

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