Financial Report: Types, How to Read, and How to Use Them for Investment Decisions

In the current era, investors face an abundance of information and rapidly changing markets. Relying solely on technical analysis or expert opinions is not sufficient. Factual data from financial reports has become one of the key tools that help investors and executives make rational decisions, as financial reports reveal the true financial position of a business over a specific period.

What are Financial Reports and What Are Their Benefits?

Financial Statements (Financial Statement) are summarized documents of an organization’s financial data prepared to inform interested parties about the company’s financial status and management performance through profit and loss statements, cash flow usage, and financial position during a specified period.

Organizations are required to prepare financial reports to submit to government agencies such as the Department of Business Development and the Revenue Department. Additionally, these reports assist management in planning and making decisions regarding investments, business expansion, or future financial management effectively.

Types of Financial Reports and Main Components

Financial reports consist of three main sub-reports, each with different objectives:

1. Balance Sheet (Balance Sheet)

This statement is akin to a snapshot of the company’s financial position on a specific date, such as December 31, 2022, showing an overview of assets, liabilities, and shareholders’ equity.

Components of the balance sheet include:

• Assets: Cash, trade receivables, supplies, equipment, and other assets
• Liabilities: Trade payables, loans, and other debts
• Shareholders’ Equity: Registered capital, retained earnings

Importance: Investors and creditors can assess the company’s debt-paying ability and financial strength from this statement.

2. Income Statement (Income Statement)

Unlike the balance sheet, the income statement shows performance over a period, displaying revenues, expenses, and net profit or loss incurred.

How to read:

• Check whether revenues are increasing or decreasing
• Analyze the proportion of expenses relative to revenue (Cost Control Ability)
• Evaluate net profit and compare with previous years
• Calculate EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

3. Cash Flow Statement (Statement of Cash Flows)

This statement shows cash inflows and outflows during a specified period, divided into three main activities:

• Operating Activities: Cash from sales of goods/services
• Investing Activities: Cash used for purchasing equipment or cash from asset sales
• Financing Activities: Cash from borrowing or cash paid as dividends

The cash flow statement helps investors understand the company’s liquidity and how actual cash is used, which can be more important than profit figures in some cases.

4. Statement of Changes in Equity (Statement of Changes in Equity)

This statement records changes in the company’s equity, resulting from:

• Issuance of new shares
• Accumulated profits or losses
• Dividend payments
• Changes in other liabilities

5. Comprehensive Income (Comprehensive Income)

Records all financial impacts on the organization’s assets, including:

• Net profit or loss: Returns from business operations
• Market value changes: Fluctuations in stock or trading contract values

Advantages and Limitations of Using Financial Reports

Advantages

• Objective assessment of financial position: Understand current strengths or weaknesses
• Business planning: Help management decide on investments, expansion, or cost management
• Access to appropriate funding: Use data for loan applications or finding investment partners
• Performance evaluation: Know where profits come from and how assets are utilized
• Future growth planning: Identify opportunities and obstacles for business expansion

Limitations

• Complexity: Numerous figures and complex relationships, especially in large organizations
• Inaccuracy: Some data may contain errors or be revised later
• Numerical only: Cannot reflect qualitative information such as management issues or market trends
• Comparison difficulties: Accounting policies may change, making current year data different from previous years

How to Read and Analyze Financial Reports

Key Questions to Ask

When reviewing financial reports, consider asking yourself:

Regarding the Balance Sheet:

• What is the total value of assets?
• Have total liabilities increased or decreased compared to last year?
• Has shareholders’ equity increased or decreased?

Regarding the Income Statement:

• What is the trend of revenues?
• Are expenses abnormal or unusual?
• Has net profit increased or decreased compared to last year?

Financial Ratios:

• What is the debt-to-asset ratio?
• What percentage of revenue is net profit?
• How efficiently are assets utilized?

Websites and Resources

For U.S. stocks, you can find financial reports from:

1. Company “Investor Relations” websites: e.g., Tesla Investor Relations or Amazon Investor Relations
2. Financial data websites: Investing.com, Bloomberg, Reuters, Yahoo Finance, Google Finance
3. Analyst reports: Stock analysts often compile financial data and provide recommendations
4. Financial institution databases: Banks and financial institutions offer Equity Research Reports

Financial Reports for Nonprofit Organizations

Organizations without profit motives, such as foundations, associations, or development organizations (Nonprofit Organizations), are also required to prepare financial reports.

Main components:

• Income Statement: Shows income (e.g., membership fees, donations) and expenses over a period
• Balance Sheet: Shows assets, liabilities, and net assets
• Statement of Changes in Net Assets: Records changes in net assets

Example income and expense report for an association:

Why Study Financial Reports?

Investors and management should study financial reports for the following reasons:

1. Assess Financial Strength

Financial reports show whether the business has a stable financial condition, its ability to pay debts, and how this status has changed over time.

2. Make Rational Investment Decisions

Analyzing profitability, growth rate, and financial risks helps investors decide whether to invest in that stock or organization.

3. Monitor Management Performance

Check whether management uses financial resources efficiently, controls expenses, and whether profits are sustainably increasing.

4. Plan Risk Management

Understand potential financial factors in the future, enabling preparation and risk reduction.

5. Evaluate Shareholder Value Creation

Assess whether the business generates profits and additional value for shareholders, guiding decisions on dividend payments or further investments.

Using CFDs to Trade U.S. Stocks After Studying Financial Reports

After studying and analyzing financial reports, investors can choose from several investment methods:

Direct Investment in Stocks

Buy stocks through a broker for long-term holding, enjoying benefits such as dividends and stock splits.

Contract for Difference (CFD) (CFD)

CFDs offer several advantages:

• High leverage: up to 1:20, enabling higher returns than traditional investments
• Two-way trading: buy (BUY) or sell (SELL) to profit from upward and downward trends
• No restrictions: day trading without limits
• Low costs: no high deposit requirements like traditional trading

Comparing CFDs with Traditional Stocks

Recommendations for Investors

High leverage ratios are a double-edged sword – they can increase profits but also amplify losses. Therefore, investors should:

• Study proper leverage usage according to the situation
• Understand transaction timing accurately
• Set acceptable risk levels
• Use demo accounts for practice before real trading

Summary

Financial reports are essential tools that help investors, business owners, and managers make informed decisions and plan operations rationally. Proper study and analysis of financial reports are the first steps toward successful investing.

If your business lacks an accounting team or you require professional services, hiring an accounting firm to prepare, review, and analyze financial reports will ensure data accuracy and maximize usability.