What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


What Are Two Financial Statements That Are Needed When Dealing With Stocks?

Original post by Geri Terzo of Demand Media

A company may feature certain items from financial statements in a press release.

A pair of financial statements that are necessary when dealing with stocks, especially when the financial security is being considered as an investment, include the income statement and a balance sheet. Each of these documents are combined with a company's regulatory filings and may also be found on the investor-relations page of the business's website. These documents offer investors a look into the financial situation at a firm and may help individuals to make more educated investment decisions.

Identification

Publicly traded companies issue an income statement and a balance sheet on a quarterly and yearly basis. The financial information on both financial statements reflects activity that unfolded over the previous three-month or 12-month period. Essentially, the income statement encapsulates the profitability or loss experienced during a period. A balance sheet lists a company's assets in relation to its liabilities. The features in either statement reflect, in part, the type of risk associated with a stock investment.

Income Statement

According to MSN Money, an investor is likely to benefit from exposure to a company's stock when that business has minimal expenses in comparison with sales. Both of these features, expenses and sales, are listed on the income statement. Profitability represents another feature that investors should know. Net income and bottom-line growth are alternative ways of expressing profits. Also, profits are expressed on a per-share basis, and financial analysts and corporate analysts typically establish expectations for these results. When a company misses a profit estimate, it is something to investigate.

Balance Sheet

By reading a company's balance sheet, an investor can gain a perspective on what that business's assets are in comparison to any debts. When assets outweigh debts, that's generally a positive sign. In the event the ratio is reversed, an investor may want to at least learn the reason why liabilities outweigh assets before investing. An interesting feature of this document is the retained earnings. It is a reflection of how likely a company is to reinvest profits in the business versus distributing profits via dividends to investors.

Considerations

According to a 2011 article in News-Sun, which is published by the Chicago Sun-Times, the merits of a financial statement might not be enough to justify owning a stock over the long term. This perspective is in light of a global economic crisis that threatened the financial markets in the U.S. and across Europe during this time. Even when companies are posting revenue growth and profitability, the strength in a balance sheet may not be enough to counter macro-economic events that are weighing on the world markets.

                   

References

About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images

Advertisement