Chapter 16

Ten Tips for Reading a Financial Report


Judging profit performance

Bumping into unusual gains and losses

Distinguishing cash flow from profit

Looking for signs of financial distress

Recognizing the limits of financial reports

You can compare reading a business’s financial report with shucking an oyster: You have to know what you’re doing and work to get at the meat. You need a good reason to pry into a financial report. The main reason to become informed about the financial performance and condition of a business is because you have a stake in the business. The financial success or failure of the business makes a difference to you.

Shareowners have a major stake in a business, of course. The lenders of a business also have a stake, which can be substantial. Shareowners and lenders are the two main audiences of a financial report. But others also have a financial stake in a business. For example, my books are published by John Wiley & Sons (a public company), so I look at its financial report to gain comfort that my royalties will be paid.

In this chapter, I offer practical tips to help investors, lenders, or anyone who has a financial stake in a business glean important insights from its financial reports. These tips also help anyone else with an interest in the financial reports of a business.

Note: In Chapter 10, I explain the basic ratios that investors and lenders use for judging the profit performance and financial condition of a business. I don’t ...

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