Financial statements provide important information regarding a company’s revenue, expenses, profitability and debt that can illuminate the health of a company over a certain period of time as well as offer a glimpse into performance, operations and cash flow. At Tegus, we know how important accurate and available information is; especially when investigating a company and making investment choices.
Historical financial statements – found on Tegus’ BamSEC – allow investors to map the larger picture of a company, building on prior statement data to enable the tracking of directional momentum across performance indicators. After all, one can’t measure change and its direction without a baseline.
When it comes to reporting, financial statements – including 10-Qs, 10-Ks and 8-Ks – are systematically evaluated, scrutinized for positional trends and examined thoroughly for current and potential risks. Most finance professionals and investors are well-versed and highly adept at reading and interpreting financial statements to derive critical insights that support their decision-making frameworks. For those relatively new to the game, we’ve broken down the main components below.
There are three main types of financial statements, that of the balance sheet, income statement and statement of cash flows. The first, delivers a snapshot of a company’s financial position at a given point in time spanning assets, liabilities and equity, and can aid in interpreting a company’s net worth.
The second – income statement – showcases revenue and expense numbers incurred within a specific timeframe, giving insight into profitability and performance. And the last, statement of cash flows, highlights cash inflows and outflows, metrics that can be used to assess liquidity and stability. When interpreting the financial health of a company, institutional investors take into account components across these statements, including assets, liabilities, revenues, expenses and cash flows.
Most investors will also calculate ratios in order to gain an even deeper understanding of performance. Common and most referred to ratios, include liquidity, debt, profitability, efficiency and activity ratios. These ratios correlate with a company's asset turnover, profitability compared to competitors, debt-to-asset ratios, liabilities outlook and other important aspects as well as create a foundation on which investors can base predictions about future performance.
Ratios are frequently used to compare a company's performance to industry averages, revealing whether a company is performing better or worse than its peers. Trends across a company's historical financial statements generate critical insights that determine evaluation. Take abrupt changes in categories like net sales, accounts receivable or operational cash flow, for example, these are markers that signify attention is needed. But context is also important. For example, if a company has undergone a period of rapid growth, it may be beneficial to investors to review statements from the same period in the previous year to identify and account for any potential risks or opportunities that may have been overlooked.
Accuracy in financial statements not only underpins sound business decisions - indicative of their relevance to investors – but are a factor used to inform decision-making around compliance. Statements must adhere to Generally Accepted Accounting Principles (GAAP) and other applicable regulations. Companies must be aware of the potential for fraud and other irregularities that can occur in their reporting and ensure internal controls are in place to prevent misstatements or inaccuracy for proper presentation. Misrepresentation can lead to undesirable impacts such as lost money for shareholders.
Whether forecasting, searching for underperforming areas for improvement, to inform resource allocation or opportunity capitalization, historical financial statements prove useful across the investment chain. Like a company report card, investment decisions hinge on critical pieces of information showcased in historical statements.