Fundamental Analysis: Getting Information

Submitted by Sharemarket News on 13 May, 2011 - 17:57

Learn where to get data to analyse companies.

So where do you get all the data to analyse a company? You look at financial statements. Financial statements are documents containing an incredible amount of information about a company's activities. The sheer volume of data in these reports can be confusing at first, but like all things, practice makes reading them easier.

Even if you are not a shareholder—who get their annual reports in the mail—you can still view financial statements in the Australian Securities Exchange (ASX) website, under the company announcements section. Annual reports are usually released during the 'reporting season.' An annual report contains the balance sheet and financial report.

Financial reports show assets and liabilities, income and expenses (gains and losses), cash flows, and equity (and changes). The main parts of the financial report are the balance sheet, income statement, statement of equity, cash flow statement and notes. Let's take a look at each in detail:

Balance sheet

The balance sheet records the company's assets (resources the business owns), liabilities (debt) and equity (total amount of money the owners have contributed to the business) for a particular period. The three elements should "balance" according to this equation:

Assets = Liabilities + Shareholder's Equity

Income Statement

The income statement contains information about revenues, expenses and profit generated from business operations. It is the company's performance yardstick over a specific period of time.

Cash Flow

Statement of cash flows tells you where the cash is going and the corresponding activities.

If this is the first time you are reading financial reports, do not give yourself a migraine by absorbing all the fine print in one sitting. Get a hang of the big picture by focusing on headline figures like net profit, debt and cash flow. If you want to peruse the notes section, you will find the largest shareholders and the salaries of the big bosses.

Another section where you can get the gist of the company's performance is the director's report, usually located at the beginning of the annual report. Major achievements and future projections are summarised here.