With recent earnings releases, do you really understand what's going on? When analysts talk about EPS of this much, or Revenues of that much, do you go, ah yes!, or huh what's going on?
Know Financials!
A company's financial statements are just about as important as ABC when it comes to investing. Financials are probably the best indicators of a company's health, their performance in the past and a benchmark to how good they would do in the future. A prudent investor would seek out quality companies with strong balance sheets, solid earnings and positive cash flows.
So what are these financials? Well there are three world-wide adopted financial statements that GAAP requires (GAAP standing for Generally Accepted Accounting Principles, or simply the bible to accounting): Balance Sheet, Income Statement and Statement of Cash Flows.
The Balance Sheet is a statement of assets and liabilities as at a certain date (frozen in time). It shows how the company's assets have been growing, how efficient they have been used, or alternatively how liabilities have been handled. For example, you would be able to see debt on this set of financials, and a company with a lot of debt, is a company that looks scary to invest in.
The Income Statement shows revenues, expenses and profits or losses. It accumulates all the revenues earned, and expenses incurred within a certain timeframe. For example, you would be able to see growth in revenues, or a decline in expenses, and finally whether the company made a profit or a loss.
The Statement of Cash Flows, perhaps the one growing the fastest of importance shows how efficient the company is spending its money. Whether they are spending more on capital, paying more on expenses, and finally how much cash if left to distribute to investors in the form of dividends.
I'm not going to get into too much detail here, but will leave you all with this. The numbers in a company's financials reflect "real world" events. They're not sample questions you would be practicing during Accounting 101. Real-world investors use these numbers and the financial ratios to understand how well the company's stock prices are doing. They are the fundamental building blocks! Financial theories and valuation models all require these information for number crunching, and with that, investors have an understanding of what the company does, its products and/or services, and the industry in which it operates.