Financials are objective data that describe a company’s financial health and viability, including its balance sheet, income statement, and annual report. These are important tools for fundamental analysis of stocks, with the annual report being the most useful for quickly assessing a company’s financial performance. The balance sheet and income statement provide more specific information, while the value of earnings before interest, taxes, depreciation, and amortization (EBITDA) is debated in its usefulness.
In business and finance, it is common to speak of a company’s financials, which are simply a group of objective data that describe the financial health and viability of a company. Financial statements can include a company’s balance sheet, income statement, annual report, and other indicators. The in-depth financial review is the bulk of fundamental analysis of stocks and their underlying companies.
The annual report is perhaps the most useful tool to quickly assess the state of a company’s financial performance. Publicly traded companies are required to file annual reports, which detail all of the company’s activities during the previous 12 months. An annual report will include any information that may be relevant to shareholders and others who have an interest in the company. It can be as short or as long as needed, and some companies go the extra mile to include humorous anecdotes or other elements to lighten what might otherwise be a boring read.
While an annual report offers a broad view, other financials, such as a company’s balance sheet, shed a more penetrating light on specific numbers and what they mean. A balance sheet includes three parts: all of the company’s liabilities, its assets, and net worth. Liabilities can include debt or operating costs, while assets include things like accounts receivable and inventory. The third part, net worth, is simply the value that remains after liabilities have been subtracted from assets. This is also known as the company’s net worth.
Related to the balance sheet, and somewhat simpler, is the company’s income statement. It shows what a business has earned, as well as the expenses it has incurred over the course of the year. Revenue minus expenses equals net operating income, which is very important information to know when assessing a company’s financial health.
Another part of a company’s finances that is less well known is the value of its earnings before interest, taxes, depreciation and amortization (EBITDA). Whether EBITDA is really a valuable measure of something is up for debate, as it basically means a company’s net profit before certain fixed expenses are taken into account. It has some value in private equity transactions, because the values it omits would change under new ownership. However, it is often seen as having little real meaning to the individual investor, or even to many institutional investors.
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