Stock Investment and Financial Review

Stock Investment and Financial Review

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I have never done well investing in stocks, so I have always left this up to the experts. However, if I were to make the decision based on only one financial statement, I would first need to know what my goals are. If I am investing for long-term capital gain, then I may want to evaluate if the company is reinvesting and growing. In contrast, if I am looking for a steady income from dividends then I may want to know what the dividend yields are along with retained earnings. For the purpose of this assignment, I will base my decision as if I were seeking a long-term capital gain investment.

Our choices of financial statements covered in Chapters 4 & 5 are the income statement, balance sheet and the cash flow statement. With only one statement to choose from, it would be necessary to use comparative statements.

The income statement helps to predict future cash flows by evaluating the past performance of the company to its competitors and predicting future success by comparing revenues, earnings and cash flow. Equally, this report helps to assess risk that the company can meet their cash flow predictions. However, the income statement does have its limitations. This statement can be varied depending on accounting methods used and possible omissions made by companies, in addition to varied measurement judgments.

The price earnings ratio is an indicator of expectations of future growth. A high P/E ratio indicates a higher potential for future earnings. In addition, the operating expense ratio measures the ability of the company to control operating expenses. This ratio should be lower with a declining trend. Another line to view is the total revenues by comparison to determine if the revenues are increasing or declining. The bottom line in the income statement is whether there is a