How to Analyze a Finance Report
Financial reports are tools that reflect and represent accurately the state of a company's health. Analyzing the financial report will help you understand if it is a company worth investing in. The three components that are present in a financial report of a company are income, cash flow and the balance sheet.
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Instructions
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Check the cash flow statement, which is the easiest way to check the health of a company. It reflects the net change in the cash from the statement of the previous month.
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Check the income statement, which deals with the reason for the cash change. It will specify if the cash flow increase was due to increased sales, cost control, sale of assets, etc.
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Check the balance sheet statement, which gives you information about the assets, liabilities and net worth of a company on a specified day. It is either prepared internally or by accounting experts from a financial firm.
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Calculate the combined value of the cash flow, income statement and balance sheet statement as a representation of the financial health of a company on a particular date. All three reports are issued by publicly traded companies when reporting quarterly and annual reports, and they are certified by a public accountant.
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Analyze a financial report by comparing the balance sheets and income statements from one period to another and finding out if the change has been positive.
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Use different ratios to judge the financial health of a company. The liquidity ratio is the ability of the business to recover its investment without borrowing or investing more into the business. The formula is:
Liquidity ratio = Current assets / Current liabilities
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Calculate the solvency ratio to understand the company's ability to be solvent and avoid bankruptcy. The formula is:
Solvency ratio = Net worth (total capital or equity) / Total liabilities
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Determine the profit ratio to indicate how much net income was earned on every $100 of revenue in sales. The formula is:
Gross profit margin = Gross income / Total revenue
Net profit margin = Net income / Total revenue
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Tips & Warnings
For the investor, the most important ratio or barometer to consider is profitability--i.e., net income or profit after tax--since future profitability is what every investor expects.
