Shareholder Use of Financial Information

In global financial markets, investors tend to show an admiration for companies that publish accurate accounting reports. These firms usually receive support for their efforts to shore up corporate reporting processes, generally in the form of higher stock prices. Shareholders use corporate financial information to adjust their investment bets in the long term.

Definition

A shareholder is an investor who has purchased a company's stocks on a financial exchange for a long-term perspective or short-term profit motive. Institutional investors are companies, such as insurance firms and pension funds, that buy shares to diversify their holdings. Financial data that investors use depend on objectives pursued. However, the most important accounting pieces of information used in investment analysis come from balance sheets, income statements, cash flow reports and financial ratios.

Corporate Financial Condition

A company's financial condition provides detailed accounts about the state of corporate affairs. Analyzing the firm's economic soundness indicates to senior management the rising influence that lenders might assert on operating activities, especially if department heads do not rein in the corporate debt pile. Shareholders sift through a company's balance sheet to make sense of the assets, liabilities and equity capital that a firm uses to reach economic success. Assets are resources, such as cash and production plants. Liabilities are debts, such as bonds payable.

Profitability

Reviewing corporate profitability enables stockholders to draw a line in the sand with respect to how long they are willing to support a struggling company. Equity buyers thoroughly review a firm's statement of profit and loss to set blockbuster business units apart from moribund segments. In fact, they might strike a defiant tone if corporate leadership does not re-adjust operating strategies for failing businesses. In an economy in which the squeaky wheel often gets the grease, senior executives make sure they take into account the complaints of shareholders who are dissatisfied with the state of corporate affairs.

Liquidity Review

Equity buyers who review a company's liquidity flows want to convey to senior leadership that they take cash management seriously. In poring over cash inflows and outflows, shareholders pay close attention to how management uses corporate funds, with an emphasis on how much liquidity remains in the company's coffers. Stockholders review the statement of cash flows to determine corporate liquidity trends. This accounting report provides insight into corporate operating, investing and financing cash flows.

Financial Analysis

Shareholders rely on accounting ratios to analyze the economic ups and downs of many firms and pit company versus company in the same sector. These performance metrics tell the tale of how companies deploy tactics to meet their budget targets, focusing on how corporate management sets operating standards to quell investor fears. An example is net profit margin, which equals net income divided by total sales. The ratio indicates to shareholders whether corporate strategies are effective in generating more revenues than the competition.

References

• Thomson Reuters: Handbook of SEC Accounting and Disclosure
• University of Pittsburgh: Sources for Corporate Financial Data
• Investor Environmental Health Network: Toxic Stock Syndrome
• U.S. Securities and Exchange Commission: Information Matters
• U.S. Securities and Exchange Commission: Information Available to Investment Company Shareholders
• U.S. Securities and Exchange Commission: Form 10-K