How To Develop A Basic Understanding Of Financial Statements

How To Develop A Basic Understanding Of Financial Statements

The Basics of Understanding Financial Statements

What are the Basics of Understanding Financial Statements?

One of the key points I understood as I studied investments was the importance of understanding accounting and more importantly, understanding the financial statements.

In my opinion, it is  the most critical aspect of investing, after all, accounting is the language of business and a lot can be determined by analyzing the numbers alone.

E.g. you can confirm whether management is doing a good job of running the business by analyzing the ROE or CROIC, or whether management is being overly optimistic when margin trends show that the business is actually deteriorating.

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There are many books that teach you accounting, but the more important lesson is to understand how it relates to investing.

I’ve previously written a series on understanding and interpreting the financial statements.

  • Understanding the Income Statement
  • Understanding the Balance Sheet
  • Understanding the Cash Flow Statement

Plus another one showing how to interpret items from the financial statements to see whether a company has a competitive advantage.

  • Interpreting the Financial Statements to find Competitive Advantages

The Basics of Understanding Financial Statements

Mariusz Skonieczny who also blogs at Classic Value Investors has written a book titled “The Basics of Understanding Financial Statements” which is a great book written for the investor by an investor.

It is not a revolutionary book, but it is great at what it is meant to do, and that is to provide a step by step guide in going through the basics of understanding the financial statements.

I’ve only written blog articles on the topic, but the book is much more thorough and provides plenty of images, numbers, arrows etc to make it easier to understand.

If you are a beginner or in need of clarification for some aspects of the financial statement, then this is a great book. If you are an advanced investor and know the financial statements like the back of your hand, then this is a great refresher to keep on your shelf.

I believe that I am never too good for the basics. A strong foundation is a requisite and starting off with the basics is the only reason why I’ve managed to create my own financial statement and stock analysis spreadsheets.

The book takes you through each financial statement and each financial statement is further broken down into each line item and how it relates to each other.

Go ahead and take a read. You’ll be a better investor for it.

Via: oldschoolvalue

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