What are financial statements and how do they impact investing?

What are financial statements and how do they impact investing?

Financial statements are formal records of the financial activities of a business. They include the balance sheet, income statement, and cash flow statement. Investors analyze these documents to assess a company's performance and make informed investment decisions.

Can you explain the three main types of financial statements?

Sure! The three main types are: 1) Balance Sheet: shows assets, liabilities, and equity at a specific point in time. 2) Income Statement: summarizes revenues and expenses over a period, showing profit or loss. 3) Cash Flow Statement: tracks cash inflows and outflows, indicating liquidity.

How do I use these statements to evaluate a company's performance?

You can use financial ratios derived from these statements, like the price-to-earnings ratio from the income statement or the current ratio from the balance sheet, to compare a company's performance against its peers and industry standards.

What should I look for in a cash flow statement?

Focus on the cash flow from operating activities, as it indicates the company's ability to generate cash from its core business. Also, check for consistent positive cash flow over time, which is a good sign of financial health.