Financial Statements 101: Why Do Investors Need to Know This?

In the current investment world, decisions should not rely solely on feelings or rumors. What matters most is factual (FACT) derived from analysis, and one of the most valuable sources of information is financial statements because they tell the company’s financial story through concrete numbers and data.

What are Financial Statements? Why Should You Care?

Financial statements (Financial Statement) are documents that summarize a company’s financial information, showing how healthy the company is, its profit or loss, whether it has enough cash on hand, and how much debt it carries.

In principle, financial statements have three main objectives:

• Assess financial position: Check if the company is strong
• Analyze performance: See how well the company is making profits
• Make investment decisions: Provide basic information for buying stocks

All businesses are required to prepare financial statements to submit to tax authorities. Besides that, they can also be used as tools for planning and business decision-making.

How many types of financial statements are there? What are they?

Financial statements consist of four main parts:

1. Balance Sheet (Balance Sheet) - Warning signals

This statement shows as of a certain date how much assets the company has, how much liabilities, and how much equity remains for the owners. Think of it as a snapshot of financial health.

Simple formula: Assets = Liabilities + Equity

If the company’s assets are significantly greater than liabilities, it indicates a strong position. But if liabilities are soaring, caution is advised.

2. Income Statement (Income Statement) - The most important

This statement shows over a year how much revenue the company earned, expenses incurred, and whether it made a profit or loss.

This is what investors are most interested in because:

• To see if revenue is growing
• To check if expenses are controlled
• To see if net profit is increasing or decreasing

3. Cash Flow Statement (Cash Flow Statement) - The unseen danger

Many think high profit = happiness, but actual cash withdrawal might not match. This statement shows actual cash inflows and outflows of the company.

If a company is profitable but has no real cash, it could be a warning sign.

4. Statement of Changes in Equity (Statement of Changes in Equity)

Shows changes in equity, such as issuing new shares, paying dividends, or retained earnings.

Benefits of Reading Financial Statements

✓ Reduce risks: Prevent investing in companies with hidden problems

✓ Make informed decisions: Not just guessing, but using real data

✓ Find market opportunities: Spot fast-growing companies with undervalued stock prices

✓ Analyze competition: Compare profits of different companies within the same industry

✓ Financial planning: Know how much to invest and when

Disadvantages and Limitations

✗ Very complex: Some find it hard to understand due to many accounting terms

✗ Data is lagging: Financial statements are released slowly, and the market may have already changed

✗ Just numbers: They don’t tell about other factors like company personnel, market trends, or competition

✗ Data may be inaccurate: Accounting flexibility means companies might present numbers more favorably than reality

How to Check Financial Statements

If you want to read financial statements of foreign stocks, such as US stocks, there are several ways to access:

Company websites: Most companies listed on stock exchanges have an Investor Relations section where they publish financial reports.

Financial data websites: Investing.com, Bloomberg, Yahoo Finance, Google Finance, etc., provide summaries in charts and tables.

Analyst reports: Stock analysts often write reports that break down financial statements for easier understanding.

5 Key Questions When Reading Financial Statements

1. Balance Sheet: What is the total value of assets? Total liabilities? Net assets?

2. Income Statement: Is the company profitable or not? Has profit increased or decreased compared to last year?

3. Cash Flow Statement: Where does the cash come from? Where is it spent? Is cash increasing or decreasing?

4. Financial Ratios: What is the debt-to-asset ratio? Is earnings per share rising?

5. Risks: What risk factors are concerning? Does the company have a risk management plan?

Using Financial Data to Decide on Buying Stocks

After reading and understanding financial statements, the next step is choosing an investment tool.

Besides traditional stock buying, you can also use CFD (Contract for Difference), which is suitable for investors seeking more flexibility.

Comparison: CFD vs Traditional Stocks

Advantages of CFDs:

• Higher leverage = lower costs but higher returns
• Can sell short to profit from falling prices
• No need for large cash reserves like traditional stock buying
• Ideal for short-term traders

Disadvantages:

• High risk due to leverage; losses can exceed initial investment
• Requires risk management skills

Summary: Why Are Financial Statements Important?

Studying and utilizing financial statements helps investors to:

✓ Reduce risks by identifying hidden problems

✓ Make decisions based on solid data, not feelings

✓ Find real opportunities in the market

✓ Understand the companies they invest in, avoiding surprises later

Whether you’re a long-term investor or a short-term trader, knowing how to read financial statements is a fundamental skill that increases your chances of success. So, if you haven’t started reading them yet, begin now!