All the information you need to know about the company is located in only a few documents issued for public analysis (if it is an open joint stock company) annually. Of course, you will not be able to learn about some important things, such as, for example, the progress made in research and development, as this is confidential information, however, what is publicly available information should be enough to form a general idea of the state of the company. Analysis of financial statements will help you determine what was the company's profit for the reporting period, compare it with previous periods, analyze the financial stability of the enterprise, the structure of assets, etc.
A similar analysis can be done, as already mentioned, by studying 5-6 basic public documents, and in order to conduct a basic analysis of financial statements, three are enough for you. The three main public documents are the balance sheet, which focuses on the assets and liabilities of the enterprise; profit and loss statement, from which you can get information about how the company earned its profit; cash flow statement specializing in cash flow.
To start the analysis of financial statements is necessary from the balance sheet. The first thing you should pay attention to is the structure of assets. Based on the state of the company's assets, we can conclude about the prospects for the development of the enterprise. If the assets of the enterprise are predominantly non-current, it means that the company expects success in the long run, and short-term failures should not confuse potential investors. On the other hand, this may indicate the inability of the enterprise to pay off its current obligations.
As for the structure of liabilities, here, special attention, when analyzing the financial statements, it is necessary to pay attention to their ratio with current assets. If a company has too many debts and there are no funds available to pay them off, this calls into question the possibility of issuing new loans to the company.
Having studied the balance, we proceed to the analysis of the structure of profit. In addition to the final figure, we are also interested in how exactly the profit was earned. The most significant is the profit from the main activity, since it is not random, and on its basis it is possible to make long-term forecasts about the fate of the enterprise. In addition, it is necessary to analyze, due to which there have been changes in the dynamics of profit. This may be due to price changes, cost reductions or other factors. It is important for the investor to determine whether profit growth was caused by the competent policy of the company's managers, or was the result of a successful combination of circumstances in the market.
We complete our financial statement analysis with a cash flow statement. Funds can be directed to current needs and to investment, while their source is the financial activity of the enterprise and income from sales. The effectiveness of control over the receipt and expenditure of cash is an indicator of the work of company managers.
If you are interested in more in-depth information, you can look at the report on capital flows, on the basis of which an analysis of the financial activities of the company is carried out: as well as some other documents. Despite the fact that such an analysis, called rapid analysis, can not be called deep, its advantage is the speed of the test. Based on the result, in most cases, we can conclude whether it is worth investing in a particular company.