Fundamental Analysis on Financial Report

Fundamental Analysis on Financial Report

Financial report is mainly used for the fundamental analysis. Financial report or also known as financial statement is usually found in the Annual or quarterly company’s report. Financial statements are a compilation of formal reports about an organization’s financial results, financial condition, and cash flows. They are useful for the following reasons:

  • To determine the ability of a business to generate revenue, optimize cost and maximize profit.
  • To determine the ability of a business to generate cash, and the sources and uses of that cash.
  • To determine whether a business has the capability to pay back its debts.
  • To track financial results on a trend line to spot any looming profitability issues.
  • To derive financial ratios from the statements that can indicate the condition of the business to be used for fundamental analysis of the company health
  • To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.

Financial report is important as it sum up all of the financial data of the companies for certain period. Basically, there are two type of financial report

  1. Interim Financial Report : Normally published quarterly or semiannual. It is prepared in condensed form and is not audit by  independent auditor.
  2. Annual Financial Report : Financial Report prepared for a period of one year. Required to be audited by an independent auditor.

A standard content of financial statements are;

  1. Balance sheet. Shows the entity’s assets, liabilities, and stockholders’ equity as on the report date. It does not show information that covers a period of time.
  2. Income statement. Shows the results of the entity’s operations and financial activities for the reporting period. It includes revenues, expenses, gains, and losses.
  3. Statement of change of equity. Show the changes in owners’ equity over an reporting period by presenting the movement in reserves comprising the shareholders’ equity.
  4. Statement of cash flows. Shows changes in the entity’s cash flows during the reporting period.
  5. Supplementary notes. Present more detailed disclosures about the above 4 main statements and sheet. It Includes explanations of various activities, additional detail on some accounts, and other items as mandated by the applicable accounting framework.

The details of each of financial report content will be explained further in the next post. By using the data gather from the financial statement and historical share price, fundamental analyst comes out with financial ratio and measurement to analyze the company fundamentally. With the use of financial ratio and measurement, fundamental analyst analyze the intrinsic value of the companies share price. The intrinsic value is then compare with the share price to determine the position of its current share price.

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