Finance/Awareness/Education
Money Matters To All- Know The Three Important Documents of Companies Before Investing
Profit & Loss A/c, Balance Sheet, and Cash Flows are an important learning
Everyone needs money. They also spend money for it is required for transaction purposes, speculation requirements to make money, and also for savings to transfer them into investments that will give them a return.
Equity stock gives a good return as it rewards a shareholder with dividends as well as capital appreciation. Although equity stock is very popular both for investment and speculation, one should be aware of certain important aspects of the investment.
If an investor has decided to purchase the equity stock of a company, before investing there are three important documents that a person should check.
These are called :
Profit and Loss Account
Balance Sheet and
Cash Flow Statement.
They are freely available on a corporate organization’s website. They will also be available on the stock exchange websites in which the company has listed its shares for trading. Most financial databases also carry this information.
Let us see what they will help us with;
- Profit &Loss Account
Before you make an investment in equity stock, you must know if the company has been giving a profit consistently for the last three years or so. If the company has been making a profit only in that condition it can declare a dividend.
Profits and dividends are the barometers of a healthy company. The only reason for you to invest is that the company is to get a return for your hard-earned money.
What should you see? The Profit &Loss account of a company is listed with all the revenue items of the company. Its earnings and its expenses are given. This is given for one financial year.
In India, a financial year is from April 1st of a year to March 31st of the next year. For example April 1 2020 to March 31st, 2021. The financial year in India is different from the calendar year. Every country adopts its own financial year.
Earnings= Revenue generated
Expenses= Amounts Payable
Earnings-Expenses= Profit
If earnings are higher than expenses it is a profit and the health of the company is good.
If payments are higher than income generated then the company is at a loss.
2. Balance Sheet
The Balance Sheet of a company makes you aware of a company’s resources and payables. The assets of the company are its resources. They increase the economic value of a company. The liabilities are the payables of the company.
Assets can be long term or short term:
Buildings, land, machinery, and office equipment can be termed as long term assets as their usage in the company are over many years. Goodwill is also a long term asset. Inventory with the company lying unsold is a short term asset as it will soon be sold.
Liabilities of the company are:
Short term debts, loans, and accrued expenses are the liabilities of the company. It is what it owes to others. A company should be able to balance its liabilities against its assets.
A company that has more assets than its liabilities is in a relatively better position than a company that has more liabilities and fewer assets.
3. Cash Flow Statement
The cash flow statement is important for us to understand the liquidity and solvency position of a company. If we look at the cash flow statement we can easily find out how efficiently it runs its management of cash.
A cash flow statement is useful because it will give the details of how cash has moved from the sale of goods and services. The cash inflow from the sale of finished goods of the company will add to its cash position and generate incoming resources. Interest income and rent received are also cash increases for the company and payments reduce the cash of the company.
The takeaway of this article is to make every investor aware that there are three public documents of a company. These documents are called financial statements. They are important tools for assessing the financial health of a company. Check on the company’s website and then make your investments.
To conclude, When a person invests money he expects a return from it. After all money matters to all! Everyone should invest in a company only after understanding the company’s financial statements. The three important statements are the Profit &Loss Account, The Balance Sheet, and the Cash Flow Statement.
For further references:
- Preeti Singh Fundamentals of Financial Management, Ane Books
- R.P.Rustagi Taxmann’s Fundamentals of Financial Management-With Excel Applications
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