As a physician-investor, you probablyreceive countless pieces of financialinformation. The problem is your busyschedule doesn't allow you time to sortthrough all of it. Fortunately, there's away to find what you're looking forwithout spending hours reading annualreports from cover to cover. All you needto find is the company's cash flow statement,balance sheet, and earnings statementwithin their annual report. These 3pieces of information will provide youwith a good understanding of that company'sfinancial past as well as how itexpects to perform in the future.
• Cash Flow Statement. Many investorsand analysts believe the informationcontained in a company's cashflow statement is the most importantpiece of information in the company'sfinancial puzzle. This type of statementis considered one of the best measures ofa company's health. Why is it so important?It's important for 2 reasons: It providesinsight into the way a managementteam raises money and into howthey choose to invest or spend it.
• Balance Sheet. The balance sheet,which lists the assets and liabilities of acompany, is by far one of the most widelyrecognized financial statements. Assetsare listed in the order of how quickly theycan be liquidated (ie, turned into cash).Similarly, a company's debts are listed inthe order in which they must be paid.
Many investors may also be familiarwith a consolidated balance sheet. Thissheet lists the assets and debts of both aparent company and its subsidiaries, asif they were 1 company. There are usuallyfootnotes included on a consolidatedbalance sheet, which list additionalinformation that could impact the actualvalues represented.
Many investors think the balancesheet shows exactly how much a companyis currently worth (or not worth). Youmust keep in mind, however, thatbecause it's typically a forward-lookingstatement, the balance sheet can greatlyoverestimate or underestimate a company'strue monetary value. Assets listed onthe balance sheet are usually listed ascurrent assets, meaning that they will beconverted to cash, or the company willreceive payment within the next 12months. Conversely, current debts areessentially bills that the company willpay within the next 12 months.
• Earnings Statement. An earningsstatement lists revenues, expenses, andnet income throughout a given period(ie, usually a year). Similar to a consolidatedbalance sheet, a consolidatedearnings statement combines the revenues,expenses, and net income of botha parent company and its subsidiariesinto a single statement.
Because the earnings statement includesrevenues and expenses, it willshow if a company's bottom line isgrowing because revenues are increasing,or growing because the company iscutting expenses. Be aware: These statementsare also sometimes called incomestatements, earnings reports, or profitand loss statements.
Before investing in a company, understandingthe information available intheir financial statements will help youduring the decision-making process.Your financial consultant can also be agood source of information. Theirknowledge and experience can help youunderstand a company's financial situation.These basics are a good place tostart, and can help you build your financialknow-how in no time.
Joseph F. Lagowski is vice president,investments, and a financial consultant with A. G.Edwards in Hillsborough, NJ.He welcomes questions orcomments at 800-288-0901 orwww.agedwards.com/fc/joseph.lagowski. Thisarticle was provided by A. G. Edwards &Sons, Inc, member SIPC.