Yes it does exist! There is a one stop solution for making good investment decisions and mutiplying your money very very fast. Financial Statement Analysis is probably as old as the stock markets. It is one of the oldest techniques that has been used by investors and speculators to guess the value of an investment at a certain point of time in the future.
Financial Statements are the only documents that serious investors look at before investing in a business on the stock market or before buying a company’s equity/ bonds. The numbers that a company projects in these statements are reflections of the work done in the last year/ quarter. These include the investments received, the loans taken, the sales achieved, goods returned, targets achieved, assets purchased/ sold, growth achieved, etc. In short, everything that a company has done will be reflected here in terms of the funds allocated or spent on each activity in that financial year.
The numbers mentioned have to tally in the annual Profit & Loss A/c and in the Balance Sheet and have to be certified by a practicing Chartered Accountant. Therefore, the chances of these documents having incorrect information is negligible and hence, an investor can believe these statements with their eyes closed. We may still hear about cases where major corporations show funds being spent under certain headers that are not commonly used by companies, but a simple Google Search can help one identify what it means.
The details mentioned in the statements can be easily compared with the other financial statements of a company’s competitors or with industry average as a whole. A major factor that most investors do is compare all the major common heads of the company with its competitors/ industry. EX: the cost of working capital, cost of customer acquisition, marketing spend, cost of building a new factory, etc are compared to assess if the management is taking sound decisions or whether it’s wasting too much money on these activities. They also compare major financial ratios in order to check that the management is keeping its wasteful spending in check.
For companies that are new, investors compare their financials to companies that are currently in existence and use their old 1/2/3 year old financial results to understand if the startup is on track to beat competition.
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Please note that a financial statement is not a guarantee for future success, but instead it is a reflection of the efforts of the senior management of the company. It highlights the direction of the company and talks about the potential that it has. It is here that an investor takes a calculated risk and invests in a company assuming that the value of the stock will rise and let him grow his investment.
Many Financial Gurus and ace investors like Benjamin Graham, Warren Buffet & Prem Watsa have been quoted saying that a good analysis of a financial statement is the reason for its success. However, it is your ability to read this, use this knowledge and then make the best of it that defines the value of your investment. This is what distinguishes Billionaires & Millionaires!