Question

to what extend does financial statements help in investment decisions?

(can you guys please explain it thorougly, its for a reseach)

Answer 1

By reading the financial statements of any entity, you can have a brief understanding on the state of affairs of the entity, the nature of business, board of directors, auditors, any legal suits against the company, any regulatory commission applicable for that.

Now coming to the numbers, from the financial statements you will be able to identify the net income of the company along with the capital position. But in order to make investment decisions, you will be using the financial statements in ratio analysis inorder to assess the credit worthiness of the entity and to know the liquidity of the entity.

You can also know the off balance sheet items like Bank guarantees, letter of credits if any given by the entity from the notes to financial statements.

But there is a lot more groundwork to be done other than financial statements if you want to invest in the company. You need to follow the company's history, the industry growth and industry updates in which the company operates. Compare the results of its competitor's with the company's. Follow the board of directors of the company.

.

Hope this helps.