Why are financial statements vital information for investors?

A company’s financial statements give a good picture of a business’s economic accomplishments and a scope of what to expect in the future of their standing within their industry. 

“A company’s financial conditions are of major concern to investors and creditors. As sources of finance for your company operations, investors and creditors rely on financial reports to gauge conditions for both the safety and profitability of their investments,” says Way, investment writer for chron.com. 

Financial statements provide critical indicators of success for investors or creditors considering entering into a partnership with the companies in question. 

What information should investors focus on?

A business’ financial statement is akin to a school report card. It lists pertinent information on how well or poorly a company is doing. But when scrutinizing a financial statement, it’s essential to pay special attention to the following details:

Sales

All earnings made by the company you’re investigating will be the most crucial piece of information you consider. Sales data lets your know whether a company is in growth or decline, making it essential to determine its worth as an investor.  

To determine if the business in question sees an upward trend, “—you need to add up the data in each of the past four quarters, as well as the same quarter in the previous period, to calculate the change,” says Matt Krantz of USA Today. 

Debt load

A company’s ability to cover expenses and meet payroll during slow periods is just one reason investors should look at a company’s debt load. But most importantly, if a business were to go out of business, equity holders will be left behind as debt holders get preference for getting their money back on leftover balances. 

Examine said company’s income statement and balance sheet to determine if there’s ample cash flow to cover a company’s debt payments and to identify any other potential problems a company may face in the future. 

Trends in Cash flow

For an investor, seeing leftover cash in the bank on a financial statement is encouraging. It is a good sign that, should unexpected obstacles arise, the business is covered on the financial end. It’s also reassuring to see that if a fresh new earning opportunity were to come up, this business has ample funds to jump right in and boost its cash flow tenfold. 

“Cash is money in hand, not the result of accounting measurements and judgment calls, as is the case with earnings and net income. When a company’s net income is much higher than cash flow, investors want to be aware and find out why,” adds Krantz. 

Customer Acquisition Cost

Customer acquisition cost describes how much money it takes to onboard a brand new customer. This number can vary greatly depending on whether the business you’re inquiring about is a newcomer to the scene versus a seasoned player. New companies tend to have more new customers, while established companies tend to balance new and repeat customers more. 

A method for figuring out customer acquisition cost is to divide the amount spent on marketing by their number of new customers. This is a critical component of a promising investment venture, as a company whose product may seem profitable in production may be a hard sell out in the market. 

Dennis Najjar of The Balance Small Business mentions, “This problem can occur with super-niche areas where it’s hard to spread the word about your product or in hyper-competitive areas where advertising competition is fierce.” 

How do you obtain statements in Singapore?

Under the Companies Act, all businesses and branches of foreign companies based in Singapore must report their financial statements prepared according to Singapore Financial Reporting Standards. 

Each financial statement includes the following information:

• Report of Directors and Statement by Directors
• Independent Auditor’s Report (if applicable)
• Statement of Comprehensive Income (Profit and Loss statement)
• Statement of Financial Position (Balance sheet)
• Cash Flow Statement
• Statement of Shareholder’s Equity
• Corresponding Notes to Financial Statements

These statements can be found on the Accounting and Regulatory Authority (ACRA) website at www.acra.gov.sg.