What Are Financial Statements ( Fundamental Analysis Series 2020 )

fundamental analysis 2020

Financial statements are one of the most vital documents for fundamental analysis. The normal investors never get a chance to interact with management, but they can definitely know about the management's perspective and their intentions from financial statements. 

So in this article, I will explain financial statements and what are they.

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Basically, financial statements are those statements from where we can know about the company's current position and how the company has done in the past and also in the last year. 

Secondly, we can know about management’s plan for the future and what risks they are taking for this. 

Thirdly we can know the important information like ratios, shareholding patterns, concerns over the business. So from all these perspective financial statements are important.

Now let's come to types of financial statements. Basically, whenever we say financial statements we mean three important statements. Balance sheet, profit and loss account, and cash flow statements.

From the balance sheet, we know about the company's assets and liabilities. If they are increasing or decreasing and at what rate they are increasing or decreasing. 

For example - you saw last year the company's unsecured loan was 1000 crores, this year it has risen to 5000 crores. so you must know the reason for the increase to such extent in an unsecured loan.

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Now let’s understand the profit and loss account. As it is reflected in its name, this statement shows you the profit and loss the company did in a financial year. 

When you see a profit and loss account, you will see incomes, you will see expenses and after that, you will get the results i.e by subtracting expenses from income you will get your profits. 

If your expense is higher than income then you will get a loss. So while conducting fundamental analysis you can check the trend of profits. Is it increasing? Is the rate of growth is increasing? If it decreased, then what may be the reason? These are the vital questions that need to be answered while conducting the fundamental analysis.

Lastly, we have to check the cash flow statements

These are the statements that give you an idea about the company’s cash. They also show your management’s effectiveness in utilizing cash. You can know how the company is utilizing cash. Is it investing more or is it draining all the expenses in irrelevant expenses? Is it planning for capital expenditure or selling off assets? All the answers can be known by reading cash flow statements.

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So these are the basics of financial statements. We will definitely discuss more in future articles. We will understand each head of balance sheet, profit and loss, and cash flow statements for a complete understanding at a basic level. 

This is a must for all investors who want to see value in a company. If you are a value investor you can’t see it by technical analysis, you need to have knowledge of fundamental analysis.

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