Financial Planning: Documents unlock a company's doors

Jay Torgerson

From credit card offers to tax statements, we receive countless pieces of financial information. If you're an investor you can get even more. While it can be trying to sort through it all, three pieces of information that usually appear in an annual report can give you a good understanding of a company's past financial performance while also giving clues to its outlook for the future. These are the statement of cash flow, the balance sheet and the earnings statement.

Cash Flow Statement - Many investors and analysts believe the information contained in a company's cash flow statement is the most important piece of a company's financial puzzle. This type of statement is said to be one of the best measures of a company's health because it provides insight into the way a management team raises money and how they choose to invest or spend it.

Balance Sheet - The balance sheet, which lists the assets and liabilities of a company, is by far one of the most widely recognized financial statements. Assets are listed in the order of how quickly they can be liquidated, or turned into cash. Similarly, a company's debts are listed in the order in which they must be paid.

Many investors may also be familiar with a consolidated balance sheet, which lists the assets and debits of both a parent company and its subsidiaries, as if they were one company. There are usually footnotes to a consolidated balance sheet listing additional information that could impact the actual values represented.

Many investors think the balance sheet shows exactly how much a company is currently worth (or not worth). Keep in mind it can, in fact, greatly overestimate or underestimate a company's true monetary value because it is typically a forward-looking view of the company. Assets listed on the balance sheet are usually listed as current assets, meaning that they will be converted to cash, or the company will receive payment within the next 12 months. Conversely, current debts are essentially bills that the company will pay within the next 12 months.

Earnings Statement - An earnings statement lists revenues, expenses and net income throughout a given period, usually a year. Like a consolidated balance sheet, a consolidated earnings statement combines the revenues, expenses and net income of both a parent company and its subsidiaries into a single statement, as if it were one company. These statements are also sometimes called income statements, earnings reports or profit and loss statements.

Because the earnings statement includes revenues and expenses, it will show if a company's bottom line is growing because revenues are increasing or because the company is cutting expenses.

Before investing in a company, understanding the information available in these financial statements may be helpful in your decision-making process. Your financial consultant can also be a good resource for helping you to understand a company's financial situation before you decide to invest. These basics are a good place to start and can help you build your financial know how in no time.

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