When a company releases earnings, its sales and profits oftenget all the attention. And while those are two very important figures for investors to look at, it’s not enough to evaluate a company’s performance.
A company’s balance sheet and statement of cash flow are just as important and could convey valuable information. A cash flow statement will show you where the company’s cash went and whether it is generating enough from its operations.
A balance sheet, however, will show you the overall health of the company’s financials. For instance, if a company has significant cash balances on its books then investors won’t need to place a big concern on if the company bled cash that period. Although that can eventually lead to a problem, it’s important to consider the context, and that’s what a balance sheet can help provide you with.
Another reason why a balance sheet is important to consider is to assess a company’s liquidity and debt. If a company has a lot of debt on its books that will impact its ability to finance future growth and whether it can even afford to expand its business.
Current assets might be high and investors could be comforted by a high current ratio, but if a significant part of the company’s current assets are hard-to-move inventory items, that ratio could be misleading.
Under any circumstance it’s always best to look at all of the company’s financial statements since that will give investors a more complete picture of how the company is performing.
