Chapter 17. Ten Tips for Reading a Financial Report

In This Chapter

• Judging profit performance

• Bumping into extraordinary gains and losses

• Comparing cash flow with profit

• Looking for signs of financial distress

• Recognizing the limits of financial reports

Reading a business's financial report is like 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 major. 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.