You Need To Understand a Company’s Income Statement Before Investing

by Hank Coleman

The other day, I talked about how important it is to read a company’s Annual Report which is also sometimes referred to as the company’s 10-K report.  This report gives you a huge amount of financial data about the company you are thinking about investing your hard earned money into. I always make sure that I read the CEO’s letter to shareholders, management’s discussion and analysis of results, income statements, balance sheets, and statements of cash flows when I look at a company’s books.

In college accounting and finance classes, the professors tell you about the three main financial reports that every investors should read before they invest a dime in a company’s stock.  And, lucky for us, they are all in the same place, the company’s Annual Report.  Every investor should know how to read and what to look for in a company’s income statement, balance sheet, and statements of cash flows.

An income statement is a means of measuring a company’s performance over a specific period of time. A balance sheet on the other hand is a reflection of a company’s performance on a day-to- day basis on a certain date in time. The income statement is one of the most important financial statements of a company. It usually is produced by the company quarterly (in 10-Q reports) and annually.  It is sometimes also referred to as the profit and loss statement, statement of operations, or just the quarterly or annual report of a company.

The income statement is useful to investors because it provides a company’s shareholders with information about its operations. This is extremely beneficial to investors because it helps to make informed decisions. The report or statement literally spells out the financial position in the market as compared to other companies. It also forecasts its future earnings and dividends. The Chairman’s letter in the statement also profiles the company’s future goals. For instance, if the company’s statement displays profits, it serves as a positive sign to future investors. It thus builds a great measure of trust in the hearts of the shareholders who had initially invested in it.

The income statement serves to benefit a host of people such as company management, competitors, government agencies, labor unions, and also to potential lenders and investors. An auditor’s letter in the income statement also confirms the validity and authenticity of it and certifies it as accurate.

How do you obtain an income statement? I can remember the days before the internet when you had to request a paper copy of a company’s Annual Report.  Companies often published lavish ones with lots of pictures and fancy graphs. Those days are long gone now of course, and some companies will not even mail you a printed copy of their reports.  Instead, they will recommend that you download it from their website or straight from the Securities and Exchange Commission (SEC).  You can search online for any report very easily on the SEC’s Edgar Database. You can also download a lot of these reports directly from the company’s website in their investor relations page.

Stay tuned in the coming days when I will dissect what to look for in a company’s Statement of Cash Flows and Balance Sheet.  Both are must reads for any investors in individual stocks!

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