Financial Statements Explained
1. When you're evaluating a company's growth rate, don't get swept away by heady historical growth. Make sure you understand where the growth is coming from and how it can be sustained over time
2. Be wary of companies that have relied on acquisitions to boost growth. Most acquisitions fail to produce positive returns for shareholders of the acquiring firm, and they make it tough to evaluate a company's true growth rate.
3. If earnings growth rate outstrips sales growth over a long period, this might be a sign of manufactured growth. Make sure to dig into the numbers to see how the company keeps squeezing out more profits form stagnant sales.
4. Return on assets measures the amounts of profits that a company is able to generate per dollar of assets. Companies with high ROAs are better at translating assets into profits.
5. ROE is a good measure of profitability because it measures how the company is at earning a return on shareholder's money. But because companies can boost their ROEs by taking more debt, dont take it as gospel. For a nonfinancial company, look for an ROE of atleast 10 percent, without excessive leverage.
6. Free cahs flow gives financial flexibility because the firm isnt relying on the captial markets to fund its expanision. Firms with negative free cash flow have to take out loans or sell additional shares to keep things going, and that can become a risky proposition if the market becomes unsettled at a critical time for the company.
7. Be wary of companies with too much financial leverage. Because debt is a fixed cost, it magifies earnings volatility and leads to more risk
8. Before you buy a stock, think throught all potential negatives. This can help you make better decision if bad news does come down the pike.
1. When you're evaluating a company's growth rate, don't get swept away by heady historical growth. Make sure you understand where the growth is coming from and how it can be sustained over time
2. Be wary of companies that have relied on acquisitions to boost growth. Most acquisitions fail to produce positive returns for shareholders of the acquiring firm, and they make it tough to evaluate a company's true growth rate.
3. If earnings growth rate outstrips sales growth over a long period, this might be a sign of manufactured growth. Make sure to dig into the numbers to see how the company keeps squeezing out more profits form stagnant sales.
4. Return on assets measures the amounts of profits that a company is able to generate per dollar of assets. Companies with high ROAs are better at translating assets into profits.
5. ROE is a good measure of profitability because it measures how the company is at earning a return on shareholder's money. But because companies can boost their ROEs by taking more debt, dont take it as gospel. For a nonfinancial company, look for an ROE of atleast 10 percent, without excessive leverage.
6. Free cahs flow gives financial flexibility because the firm isnt relying on the captial markets to fund its expanision. Firms with negative free cash flow have to take out loans or sell additional shares to keep things going, and that can become a risky proposition if the market becomes unsettled at a critical time for the company.
7. Be wary of companies with too much financial leverage. Because debt is a fixed cost, it magifies earnings volatility and leads to more risk
8. Before you buy a stock, think throught all potential negatives. This can help you make better decision if bad news does come down the pike.