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Zhi Finance » How to evaluate the company’s financial statements before investment?

How to evaluate the company’s financial statements before investment?

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If you want to learn how to evaluate financial statements before investing, this passage is certainly not enough, but we can tell you some basic concepts to help you understand financial statements and various figures.

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Before the official start, let me give you a piece of advice: it is easy to lose your savings by investing in stocks. Don’t rush to buy a stack of stocks with your hard-earned savings, let alone invest it in one stock, and control the stock at 10% of all investments. If you invest at least 12 stocks first to achieve diversification similar to that of public funds, you may be able to save a lot of money before investing in stocks. Finally, don’t trade frequently. For long-term holding of purchased stocks, the holding time is calculated by “year” instead of “hour”.

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Now, let’s learn some basic financial concepts:

  • 1. Income statement: income statement, also known as business operation statement, describes the income obtained by an enterprise over a period of time (usually settled annually or quarterly) and the costs incurred in the same period. Profit is directly reflected as “net income”.
  • 2. Balance sheet: A statement such as a balance sheet reflects an enterprise’s assets, liabilities, and owner’s equity. Assets are settled on the settlement date of the enterprise’s balance sheet, usually including cash, bank deposits, factories, equipment and other assets. The liabilities of enterprises are also listed, including accounts payable, accrued expenses, short-term liabilities and long-term liabilities, as well as other liabilities. Owner’s equity is the difference between assets and liabilities, usually listed under liabilities. Owner’s equity is the accounting value of shares held by shareholders. Note: The accounting value has little to do with the market value.
  • 3. Financial ratios: Financial analysts and investors often use many basic financial ratios to compare various enterprises and decide which one to buy and which to sell.
  • 4. Price/Yield: often called P/E ratio; Here, the price refers to the stock price, and the income refers to the profit per share. Divide the total profit of the enterprise by the total number of issued shares to obtain the income. If the stock price is $20 and the income is $1 per share, then the P/E ratio is 20/1 or 20. The economic situation will cause the average P/E ratio of the stock market to fluctuate sharply. The higher the number, the more expensive the share price is considered. Apple fans often say that although the stock price of Apple is more than 500 dollars, the stock is very cheap because its P/E ratio is low compared with other companies in related industries.
  • 5. Debt to equity swap: Debt to equity swap ratio refers to the ratio of total liabilities to total equity of an enterprise. Because of the strict supervision and obvious support of the Federal Deposit Insurance Corporation (FDIC), American banks have a very high debt to equity ratio. Many technology companies with high profit margins have almost no debt, and the debt to equity ratio is also very low. Comparing the debt to equity ratio of different enterprises in the same industry is helpful to understand the health of enterprises.
  • 6. Profit rate: the profit rate is equal to the net profit of an enterprise divided by its total sales or total income, and then multiplied by 100%. The profit margin varies greatly with different industries and different stages of economic cycle. Comparing the current and past interest rates of an enterprise and the profit margins of its peers can better understand the performance of the enterprise.

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There are countless relevant information on the Internet. Most stock brokerage companies with online trading platforms can present such information in a form that is easy to query. In fact, they still have a lot of such information. You can learn more about the enterprises you really like. MSN Finance is an independent and popular website.

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Remember: learning to interpret financial statements is very important, but it is only a part of learning to speculate in stocks.