If you are new to investing, you may wonder how to successfully analyze a company’s financials. Many people look at the company’s net income, which is an important factor. However, you should also consider other numbers such as the company’s statement of cash flow. A U.S. or U.K. based company’s cash flow management can tell you a great deal about the company, and, therefore, whether or not you want to invest in the company.
What to Analyze on the Statement of Cash Flow
When analyzing the company’s statement of cash flow, there are three important parts to consider—operations, investing and financing. Each piece gives you a separate piece of the company’s corporate finance strategy and analyzing all of them together helps you determine if the company is financially strong and a company you would like to invest in.
The operations piece of the cash flow report tells you how much money the company can generate internally. The investing piece shows you how much the company is spending for acquisitions, investments, property and equipment. It also shows you how much the company is bringing in through their investments. Finally, the financing piece shows how much the company is spending to service their debts as well as the debts they have recently paid off.
Another important piece to consider is how often the company is issuing cash dividends as it takes cash to do so.
When you consider net income as well as the company’s statement of cash flow, you can get a fuller picture of a company’s stability and financial success, which in turn will help you determine if you want to invest with them.
Steps for an Investing Novice
Of course, a new investor may want to think twice about investing in individual companies without guidance. A better strategy for a first time investor may be to invest in mutual funds so the risk is spread out over several companies. As you invest more and become more comfortable with investing, you can begin to invest small amounts into individual companies that you research careful. As your confidence and, hopefully, investments grow, you can begin to invest larger sums.
Likewise, you can hire a financial planner, but it is still in your best interest to do your research and feel comfortable with the company you are investing in because it is your money. If you lose that money due to a bad investment, you will suffer the financial consequences, not your financial planner. When investing, no one cares about your money as much as you do, so invest wisely after careful planning and research.
Post by Melissa