Understanding Company Financial Statements

Analyzing company financial statements can appear complex initially. But learning to understand them is vital when investing in shares. Some very important aspects of a financial statement are explained below:

Turnover

Turnover is the total amount of money obtained by the company within its financial year. Increasing turnover, together with growing profits can mean a buy signal.

Profit

The rise or fall in profits of a company is the best indicator to gage how well a company is performing. Profit is computed as: Sales minus Cost of Sales

Earnings per share (EPS)

As a rule, this determines how much money a company is making for its shareholders. EPS is:

Profit derivable to shareholders / number of shares in issue during the year.

The higher the EPS of a company, the better for stock market traders.

Consistent EPS growth is also essential to traders as it indicates the company is growing and, therefore, its share price is likely to rise, producing capital gains for traders!

Price/Earnings Ratio (P/E Ratio)

The price earnings ratio values a company against its per-share earnings. The ratio is computed by: Current share price / Earnings per share

The P/E ratio aids a trader measure a stock against its competitors or the sector, in general. If a company's P/E ratio is greater than other companies or its sector, then the market appreciates it highly. If it is lower than its competitors, then leave the stock alone if you plan to buy.

Current ratio

The current ratio is a measure of a company's liquidity. It shows the companies' capability to pay its short-term debts with its short-term assets.

The formula for computing the current ratio is: Current assets / current liabilities.

If assets can cover liabilities, then the current ratio will be a value greater than 1.

When acquiring a stock for a long period of time, it is vital to search for firms whose present ratios lie around 1.3 – 2.5. Any ratio below that means the firm may have a problem paying of its short-term liabilities. Any ratio beyond might signify that the firm is not using its capital in the most effective manner. Ratios outside this range mean the firm will have a hard time to make profit and, thus, their share value will struggle to rise.

Note: Key financial information of firms is almost always published on sites that offer free fantasy trading accounts. Browsing to find out who makes the most money and profits makes fascinating reading! For an excellent graphical inspection of company financials, visit ADVFN.com.