Knowing how to work with the numbers in a company’s financial statements is an essential skill for stock investors. Learn what the income statement has to offer.
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The Income Statement: From Net Revenue to Net Income |
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By Joe Lan, CFA
Earnings provide an ongoing score of a company’s success or failure and are used to determine a company’s value. A firm’s worth is dependent on its ability to earn money and generate future cash flows; reported earnings that differ, positively or negatively, from expectations can cause large movements in a stock’s price. In the article, The Income Statement: From Net Revenue to Net Income, Joe Lan explains the major elements found in the income statement and shows how each can be used in stock analysis.
Some of the topics covered in the article include:
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Accrual versus cash-based accounting
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Breaking down an income statement into a five-step format
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The importance of reviewing a statement when ascertaining a firm’s financial health
The income statement provides insight on how a firm translates its revenue into net income. It is important to assess the numerous expenses that a firm incurs throughout the financial period. Be sure to notice trends in revenues and expenses.
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Valuing a Company Based on Its Revenues |
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By Charles Rotblut, CFA
The revenue, or sales, figure from the income statement can be used to determine if a stock is currently overvalued or undervalued. Revenue-based valuations are considered to be among the “cleanest” of valuation methodologies. This is because revenues are less impacted by accounting and financial structure decisions than earnings or book value. However, revenue-based valuation measures are less frequently used than other valuation measures. The article Valuing a Company Based on Its Revenues, highlights how you can use revenue-based valuations in your stock analysis.
Some of the highlights of the article include:
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Sales don’t equal profits
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Importance of tying revenues to profitability
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The justified price-to-sales ratio
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How to factor debt into a revenue-based valuation
Revenue-based valuation methodologies can be a useful tool for determining if a stock is inexpensive, fairly priced or expensive. Because these measures are less commonly used, they may lead you to stocks whose bargain valuations have not yet been discovered by other investors.
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Member Question
What type of analysis do you usually conduct in your investment decisions?
A) Fundamental (financial ratios, market value, etc.)
B) Technical (price movements, trade signals)
C) Both
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Be sure to vote on this week’s question for the opportunity to offer your insights on our open-ended question. |
Previous Question’s Results
Are you currently supplementing your Medicare coverage, or do you plan to
Yes : 84%
No : 16%
Poll results are as of 9 a.m. (Central) on Monday. 1,955 respondents.
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