Financial statements

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Look over the various financial statements and find the relevant numbers. Every annual report should have (at the very least) a balance sheet and an income statement. Catching the important numbers on a financial statement isn't that difficult to do. However, it certainly helps when you pick up some basic accounting knowledge. Chapter 10 can give you more details on evaluating financial statements.

First, review the income statement (also known as the profit and loss statement, or simply P&L). The income statement gives you the company's sales, expenses, and the result (net income or net loss).

Look at the balance sheet. The balance sheet provides a snapshot of a point in time (annual reports usually provide a year-end balance sheet) that tells you what the company owns (assets), what it owes (liabilities), and the end result (net worth). For a healthy company, assets should always be greater than liabilities.

Carefully read the footnotes to the financial statements. Sometimes big changes are communicated in small print.

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