How to follow financial statements to make money on stocks

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Punctuality and attentiveness will not interfere.

Why keeping track of financial records is important

Any company whose shares can be bought on the exchange is public. Among other things, this means that she must tell everyone about the state of the business: revenue, profit, debt, free money and hundreds of other indicators that are combined into a single financial report.

If the investor did not have the necessary data, then he would have to make decisions at random or on emotions. In the world of finance, this is dangerous, so the specialists invented the reporting and rely on it.

To sell or buy stocks on time

Financial reporting helps to understand whether the company will bring profit or loss to the investor. If you follow the latest data, you will notice positive and negative trends. And the sooner you get to see them, the more you earn or, conversely, lose less.

For example, growing debts are not a good sign. Perhaps in a few years the company will not be able to service them and it will have to cut production. In this case, it is worth selling the shares before they start to fall in price.

In the same way, you can see the growth points of a company and invest in it while the stock price is low. For example, the main business is practically not growing, but there is a new direction. Now it does not bring much money, but it is rapidly developing and fits into the strategic objectives of the company. Probably, in a few years, stocks will bring big profits precisely because of the growth in the new area.

But people rarely invest in one or two companies, more often they keep an investment portfolio - a diversified selection of dozens, and sometimes hundreds of businesses. The same mechanism works here as with the shares of individual companies: it is better to respond to problems and business successes with a warning.

To react to the actions of other investors and the opinions of analysts

It is not only the data in the reports that are important, but also their coincidence with market expectations. If analysts predicted some indicators, but the result turned out to be worse, stock quotes will fall. It is worth keeping an eye on the publication of the reports so as not to miss a serious rise or fall of shares in price.

For example, in July 2021, Amazon published another report. The tech giant boosted sales and earnings per share, but fell a couple of percent below its forecasts.

Immediately after the publication, Amazon's quotes fell 7.5%. Two months later, they are still below the figures before the release of the report: perhaps because in the document the company predicts slow growth, which also did not meet expectations.

The opposite example is Disney Corporation. She made both profit versus loss in 2020, and revenue is higher than expected. The firm lacked only in terms of the number of subscriptions to streaming services, but that did not stop the stock from climbing 6, 98% in a couple of days.

To plan for the receipt of dividends

Not all investors invest in companies to capitalize on the growth of stocks. There are those for whom regular payments of part of the profit are more important - dividends. Specific payment dates are often set in the annual accounts.

In order to plan for expenses in advance, it is worth keeping an eye on the publication of the necessary documents.

For example, an investor earns the main money from dividend payments. He wants to give his child a car for his birthday. This will be in mid-October, just after the third quarter: if the dividends come early, then there is nothing to worry about. But if they are appointed at the beginning of November, then something will have to be invented.

When financial statements are published and where to find them

Public companies issue annual and quarterly reports. The first ones are important in order to understand how the strategy is changing and where the business is heading: Russian firms report for the last year in January-February, American companies - in March-April, because their fiscal year is not equal to the calendar year.

Quarterly reports are needed to understand the state of the economy at the moment and predict how the price of securities will change over the course of several months. This is also possible because companies publish reports in batches when the quarter closes. These are "Reporting Seasons": in January, April, August and November. For example, in the week from August 2 to August 6, 2021, about a hundred companies disclosed their indicators. And that's just the big ones.

The publication calendar is usually known in advance, dates and reports themselves can be found in several places:

• Websites of public companies. The laws of large countries require access to reports for all investors. Russian firms place them in sections like "Investors and Shareholders", foreign ones - in Investor Relations.
• Responsible government agencies' portals. For example, Russian companies provide their accounting statements in, and financial statements on special public-private disclosures of corporate information. American firms, for example, have a system run by the SEC.
• Financial media. Brief extracts from reports are quickly published by specialized media like Bloomberg, The Wall Street Journal or Vedomosti. They select the data that is most important to investors and add context - analysts' opinions and market conditions.
• Specialized sites. Portals such as, or, collect data from the reports of many companies, calculate multipliers themselves and add analysts' forecasts.

How to evaluate reporting and make investment decisions

First of all, it is worth looking at just a few basic financial indicators: revenue, profit, interest payable and receivable, free money on accounts. This is a dozen lines in a two-hundred-page report.

When the data is released, the investor can understand the state of the business and decide what to do next.

Look at the indicators in dynamics

For a superficial assessment of a company, you can trace the dynamics between quarters or years. We need data on earnings and the number of shares: they are used to calculate the EPS, earning-per-share, and earnings per share.

EPS = net income / number of common shares

The indicator is not important in itself, but how it changes over time and how it correlates with the opinion of different analysts - the consensus forecast. For example, if revenues and EPS grow over time and better than consensus, then the stock may rise after the release of the report. And if it is lower, then the quotes have a chance to fall.

Calculate multipliers

Multipliers - formulas by which companies evaluate the effectiveness of companies and compare them with each other - will help to understand the business deeper. EPS is also considered a multiplier, but others are also important:

• P / E is the ratio of the company's market price to its annual profit. It will show how many years the company will pay for itself. The faster the better.
• P / S is the ratio of the company's capitalization to revenue. Demonstrates the value the market places on each dollar or ruble of revenue.
• EV is the fair value. Debts must be added to capitalization and the free money of the company must be subtracted from it. The greater the difference between EV and the market value of a company, the more it is underestimated.
• EBITDA is profit before taxes, interest and amortization. This is an assessment of the profitability of the business itself and a hint how much it can bring to investors.

With the help of multipliers, it will be possible to gain a deeper understanding of the state of the firm. But it is even more important to compare companies from similar sectors of the economy and not be distracted by their scale. For example, it is realistic to estimate a retailer's business with 1,000 and 10,000 stores.

Check with analysts

If an investor bought shares for several months in order to "park" money or make money on a temporary rise in prices, then a negative consensus forecast will play against a person. The company may not live up to expectations, the price of securities will fall, and instead of profitable speculation, it will either have to lose money or wait for the quotes to recover.

Sell or buy shares

It will not be possible to predict the future with certainty, but with fundamentals and consensus forecasts in hand, an investor can make decisions.

Perhaps it will be more profitable for him to sell shares before the next report is released and not take risks. Or wait for the price to fall and even increase the share in the firm that it considers promising.

What is worth remembering

1. Every public company is required to disclose the details of its business - at least once a quarter. They are published by the enterprises themselves, responsible government agencies and specialized financial sites. And some more media.
2. Investors use reports to timely notice trends in the company's business and analyze the situation in the economy. This is how they look for promising investments and evaluate their investment portfolio.
3. Investors are interested not only in the report itself, but also in the opinions of analysts about the company: if the results turn out to be worse, the quotes risk falling, better - they will rise.
4. The timing of buying and selling shares depends on reporting, analyst forecasts and personal investment strategy.