|
Answer:
Dear Mr. Dugan,
The
"Wall Streeter" is right on target. There are several
other financial statement items that are also important.
You'll
find them in the financial pages of each company's
annual report. These figures are also spelled out
for each of the stocks covered by the weekly research
publication, Value Line Investment Survey (www.valueline.com).
Current
assets are the sum or total of the company's current
assets, which means any funds that can be turned into
cash within a short time frame. That time frame is
very specific - one year or less. It obviously includes
cash, but also liquid securities.
When
studying a company's financial condition, you should
compare current assets with current liabilities. You'll
want to invest in those that have enough current assets
or funds on hand to meet all of its short-term debt.
Current
liabilities refers to the debt that the company
must pay down within one year or less. You'll want
to invest in companies that are not taking on more
debt than they are taking in. Simply think of it in
terms of your own budget. Your income must be sufficient
to pay your mortgage or rent, car loan and living
expenses. Otherwise, you're in trouble.
Because
you are interested in the type of analysis, you should
also know several other key financial statement terms.
In alphabetical order:
Allowances.
This is generally not a large dollar amount, but it's
an important one. It represents things as discounts,
refunds and product returns - all items that should
be deducted from sales to arrive at an accurate picture.
Property
& Equipment. These are "non-current" assets because
they are more difficult if not impossible to quickly
turn into current assets. They include such things
as machinery, office equipment, vehicles, physical
buildings and plants, even land.
Receivables.
The amount that customers owe the company. Compare
this figure with the company's overall sales. If receivables
are way behind sales, it may indicate that the company
is having trouble collecting the money it's owed.
Sales
costs. These are charges made as a result of sales.
The figure should not be larger than revenues. If
it is it indicates that growth of sales is too expensive
to be sustained.
Finally...
Net
income. This is the company's income after taxes
have been paid. In many ways, it is the most important
item because it is the most accurate figure of the
company's income and financial strength (or weakness).
For
Further Information
There
are many "textbook" like publications that explain
financial statements, but most are extremely detailed
and geared for professional analysts, accountants
and serious number crunchers. If you're not at that
level, I recommend you read an old standard (and a
favorite of mine), Understanding Wall Street
by Jeffrey B. Little and Lucien Rhodes. There
are numerous editions of the book out there. If your
library has one of the older editions, don't worry.
This information has not changed.
Good
luck!
|
