Why analyze a company’s income statement before investing?

Why analyze a company's income statement before investing?


AT THE risk of the portfolio suffering the harsh and brutal reminder of a partial or total loss of assets, the investment in the stock market can not suffer from an approximation.

In order to avoid such a scenario, the investment must be surrounded by cautious analysis that equips the investor and gives him the means to anticipate and take advantage of all the possibilities that emerge through the figures.

Financial analysis is a kind of information fishery that evaluates the business for which you have an interest in your financial statements.

The income statements are one of the most important financial records in financial analysis of a company. He ends his financial analysis with the company’s net income, which corresponds to his economic performance for a given period. It provides information on income, expenses, profits and losses from operations.Decomposition of the profit and loss account

The successive stages of the preparation of the profit and loss account are called intermediate management balances and are as follows:

Sales figures
– Cost of articles and products sold
= Margin or gross res
– External operating expenses
(including administrative, commercial and research and development costs)
Added value
– Exploitation charges
+ Operating income
Operating or operating profit
– Financial charges and interests
Profit or loss before tax
– Income taxes
Net profit

The profit and loss account of publicly traded companies is usually produced by the company itself and published for the attention of its shareholders and potential future investors. Although the legislation prevents the dissemination of false economic information, it is in the interest of the company and its managers to always draw a positive picture that will not deter investment or undermine the confidence of shareholders . It is therefore the responsibility of the future investor to go to the quest for real information before making any investment decision.

It should be noted that the net result, which is the result at the end of a financial year, does not correspond to the company’s income, but rather the profit or dividend that can be paid back to the shareholders. The company’s income corresponds more to net sales after exercise and without deduction of any expense.

There are other financial tools for evaluating a company’s performance before the investment.

Other financial analysis and business performance tools

businessNet income from profit or loss and other interim management balances provide access to financial tools such as earnings per share (EPS), return on investment (ROI), and investment rate. Whereas EPS is the division of net income by the number of shares, the ROI analyzes the financial performance of the company by subtracting the gains thus reported by the net result, the investments incurred and multiplying the result thus found. by the inverse of the amount of the investments.

The liquidation value and the operating value are also very revealing financial indicators of the company’s state of health; for example, they are recommended by the Bank of Canada.

Overall, the quality of an investment is a function of the quality of the analyzes conducted on the asset. The choice of income statement is that of a multi-criteria financial analysis tool, intermediate balances and one that allows you to avoid any information that may affect the results and forecasts.

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