How to Read a Financial Statement Before Buying a Stock

Introduction

Before buying a stock on the stock market, it is essential to understand the financial health of the targeted company. The financial statement is one of the key documents to assess this health. It provides a clear view of the company's assets, liabilities, and equity at a given moment. Knowing how to read and analyze a financial statement allows you to anticipate the strengths and weaknesses of the company, and thus better guide your investment decisions. In this article, we guide you step by step to master reading a financial statement before buying a stock.

What is a financial statement?

The financial statement is an accounting report that presents the patrimonial situation of a company at a specific date, usually at the close of the fiscal year. It is divided into two main parts:

• Assets: what the company owns (property, receivables, cash).
• Liabilities: what the company owes (debts, equity).

The total assets must always equal the total liabilities, thus reflecting the financial balance of the company.

The main items to analyze in assets

Assets are subdivided into two major categories:

• Fixed assets: these are durable goods, such as land, buildings, machinery, or patents. They represent the company's long-term investments.
• Current assets: they include items that quickly convert into cash, such as stocks, customer receivables, and cash on hand.

A too high fixed asset value may indicate a capital-intensive company, while a significant current asset value indicates good liquidity. Analyzing these items allows you to judge the company's ability to generate income and meet its obligations.