Invest & Impress

Hello. When investing in stocks, it’s very important to understand a company’s financials, but it can be difficult to understand if you’re not an accounting major.

So today, we’re going to talk about basic accounting in a way that’s easy for non-majors to understand. Let’s learn the secrets of successful investing by the numbers.

How basic accounting affects investment decisions

Basic accounting knowledge is crucial when making investment decisions. Why?

First, accounting provides numbers that describe a company’s financial position and operating performance. These numbers provide key information for investors to value a company and make investment decisions. For example, metrics like revenue, operating income, and net income can tell you how profitable a company is, and metrics like assets, liabilities, and equity can tell you how financially stable a company is.

Second, accounting helps investors predict the future of a company. Accounting employs many techniques to analyze past financial data to predict future financial conditions. For example, techniques such as trend analysis and regression analysis can be used to predict a company’s future sales, operating income, net income, and more. Based on these predicted future financials, investors can then decide whether or not to invest.

Third, accounting can help investors identify accounting irregularities, such as split accounting. This is when a company manipulates its books in such a way that it appears to be in the black when it is actually in the red. Not only do these accounting irregularities harm investors’ interests, but they can also affect a company’s survival by reducing its credibility. Therefore, investors should be able to analyze a company’s accounting data with basic accounting knowledge to identify accounting irregularities and deal with them.

Therefore, basic accounting is an indispensable factor in investment decisions, and it can be said that it is the basic knowledge that must be familiarized before investing.

Financial Statement Reading 101: Income Statement

An income statement is a financial statement that shows the operating performance of a business over a period of time. The income statement lists key metrics such as revenue, operating income, and net income.

First, revenue is the amount of money that a business earns from selling goods or services. Revenue is one of the leading indicators of a company’s size and growth.

Next, operating income is revenue minus cost of goods sold and SG&A expenses. Operating income is one of the leading indicators of a company’s profitability: the higher the operating income, the better the company’s operating performance.

Finally, net income is operating income plus non-operating income and non-operating expenses minus income tax expense. Net income is an indicator of a company’s bottom line performance, and the higher the net income, the more dividends a company can return to its shareholders.

When reading an income statement, you should: 1) understand how each line item on the income statement is calculated; 2) compare the metrics on the income statement to each other to get a comprehensive picture of the business’s performance; and 3) look at how the metrics on the income statement have changed over time.

By reading the income statement with these considerations in mind, you can get a more accurate picture of a company’s business performance and make informed investment decisions.

Understanding corporate health with balance sheet analysis

A statement of financial position is a financial statement that shows the financial position of an organization at a specific point in time. It consists of three elements: assets, liabilities, and equity.

Assets represent tangible and intangible property owned by a business and are resources that are expected to generate economic benefits in the future. They are primarily categorized into current and noncurrent assets. Current assets are those that can be converted to cash within one year, while noncurrent assets are those that provide economic benefits over a longer period of time than one year.

Liabilities represent funds that a business has borrowed from others or obligations to repay. They are primarily categorized into current and noncurrent liabilities, with current liabilities being those that are due within one year and noncurrent liabilities being those that are due after one year.

Equity is a company’s shareholders’ equity, which is defined as assets minus liabilities. It represents the net asset value of a company and plays an important role in assessing the financial stability of a company.

There are several key metrics to consider when analyzing a financial statement. For example, the debt-to-equity ratio is the total amount of a company’s debt divided by the total amount of its equity, and is useful for assessing a company’s financial stability. Another metric is the current ratio, which is the ratio of current assets divided by current liabilities and is used to assess a company’s ability to meet its short-term obligations. A ratio of 200% or higher is considered healthy.

Analyzing the balance sheet in this way can help you understand a company’s current financial situation and potential risks, which can help you make investment decisions.

Understanding the cash flow statement and its importance

The statement of cash flows is a financial statement that shows an entity’s cash inflows and outflows over a period of time. It shows cash flows from operating, investing, and financing activities, each of which provides important information about an organization’s performance and financial position.

Cash flows from operating activities represent cash flows from a company’s core business activities. It reflects revenues, expenses, interest expense, and more, and plays an important role in assessing a company’s profitability and ability to generate cash. A positive value indicates that the business is generating cash from operating activities, while a negative value indicates that the business is losing cash from operating activities.

Cash flows from investing activities represent the cash flows generated by a business as it purchases or sells assets. It includes transactions for tangible assets, intangible assets, and financial instruments. Cash flows from investing activities usually have a negative value because a business is using cash to acquire assets. A positive value indicates that a business is raising cash by selling assets.

Cash flows from financing activities represent cash flows that occur as a business raises or repays money. Examples include issuing stock, making loans, and paying dividends. A positive value indicates that the business is raising money from outside sources, while a negative value indicates that the business is using cash to pay down debt or pay dividends.

The statement of cash flows provides information that the income statement alone cannot, because it gives you a picture of a company’s actual cash flows. This is important for investment decisions because it allows you to assess a company’s financial health, ability to raise funds, investment plans, and more.

Finding investment points with ratio analysis

Ratio analysis using accounting information is a useful tool for analyzing a company’s financial position and operating performance. It helps investors predict the future of a company and decide whether to invest in it. Typical ratios include the following

1.Profitability ratios: These are indicators that measure the profitability of a company, such as net profit margin, return on assets (ROA), and return on equity (ROE). The higher the ratio, the more profitable the company is.

2.Stability ratios: These are indicators that measure the stability of a company, such as current ratio, debt-to-equity ratio, and interest coverage ratio. The higher the ratio, the more stable the company is.

3.Growth ratios: These are indicators that measure the growth of a company, such as sales growth rate, operating profit growth rate, and total asset growth rate. The higher the ratio, the higher the growth of the company.

4.Activity Ratio: This is an indicator that measures the activity of a company, such as inventory turnover, accounts receivable turnover, and total assets turnover. The higher the ratio, the more active the company is.

5.Market value ratios: These are indicators that measure the market value of a company, such as the price-to-earnings ratio (PER), price-to-book ratio (PBR), and price-to-sales ratio (PSR). Lower ratios indicate that a company is undervalued.

There are a few things to keep in mind when analyzing ratios. First, they’re based on historical data, so they’re limited in their ability to predict the future. Second, ratios can mean different things depending on the size of the company or its industry. Third, it’s important to understand where you stand relative to your competitors.

By analyzing these ratios, investors can comprehensively judge the financial condition and management performance of a company and find investment points based on them.

Combine market analysis and basic accounting to create a successful investment strategy

Combining basic accounting knowledge with market analysis can help you create more successful investment strategies.

Accounting information is an important indicator of a company’s financial condition and operating performance, and it can be used to predict a company’s future prospects. Market analysis is about understanding the overall state of the market through economic trends, industry trends, competitor analysis, and more.

By combining these, you can analyze the financial condition and business performance of individual companies and decide whether to invest in them by considering the trends in their industry and the overall situation in the market.

For example, if a company’s revenue and operating profit are increasing, and the industry it’s in is growing, it’s a good indication of its future prospects. On the other hand, if a company’s debt-to-equity ratio is high and the industry it’s in is declining, it means that the company’s future prospects are dim.

By combining market analysis with basic accounting to formulate an investment strategy, you can be more successful in your investments.

Accounting is a very useful discipline for understanding the financial status of a company. In this lesson, we’ve covered basic accounting and solidified the basic concepts. Although accounting may seem like a difficult subject, I believe that learning it one by one will give you more confidence and help you make more successful investments. I wish you all the best as you continue to learn and grow as investors!