One friend told me that somebody said balance sheet is more important than income statement in the long term. However, personally, I believe all of them (Income statement, Balance sheet and cash flow statement) are equally important for us to evaluate the intrinsic value of a particular company. In this post, I am going to explain the function of these three statements for us, as an investor, to figure out the value of a company.
Income Statement
Income statement shows the profitability and efficiency of a particular company. For example, from income statement, we can answer some critical questions, namely, how much will be earned from every 100 dollar sales in this particular company? Is the fix cost reasonable or too high? How about the profit margin of the company products?
Balance Sheet
Balance Sheet indicates the tangible condition of a particular company. In balance sheet, we will know whether the company is in dangerous condition (e.g. too many borrowing), health condition (e.g. few borrowing and has many cash in hand), well position for next rapid growing, etc.
Cash Flow Statement
Cash flow statement depicts that ability of managment team to manage their money. We can see how much portion of Cash is generated or used in operation, investment and financial activities. In short, this statement will also indicate whether a particular company is Cash Mechine (Cash generator) or Cash Consumer. As investors, we prefer to buy cash generator so that it will generate cash annually instead of simply "consumes" shareholders' wealth annually.
To sum up, we should always analyse at least all of the three statements, that are, Income statement, Balance Sheet, and Cash flow statement, so that we will have a whole picture about a particular company in term of its profitability, tangible condition and money management ability. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.
Written by: Xaivier Chia
Income Statement
Income statement shows the profitability and efficiency of a particular company. For example, from income statement, we can answer some critical questions, namely, how much will be earned from every 100 dollar sales in this particular company? Is the fix cost reasonable or too high? How about the profit margin of the company products?
Balance Sheet
Balance Sheet indicates the tangible condition of a particular company. In balance sheet, we will know whether the company is in dangerous condition (e.g. too many borrowing), health condition (e.g. few borrowing and has many cash in hand), well position for next rapid growing, etc.
Cash Flow Statement
Cash flow statement depicts that ability of managment team to manage their money. We can see how much portion of Cash is generated or used in operation, investment and financial activities. In short, this statement will also indicate whether a particular company is Cash Mechine (Cash generator) or Cash Consumer. As investors, we prefer to buy cash generator so that it will generate cash annually instead of simply "consumes" shareholders' wealth annually.
To sum up, we should always analyse at least all of the three statements, that are, Income statement, Balance Sheet, and Cash flow statement, so that we will have a whole picture about a particular company in term of its profitability, tangible condition and money management ability. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.
Written by: Xaivier Chia
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