In business and finance, it is common to speak of a company’s financials, which are simply a group of objective data that describe the financial health and viability of a business. Financials may include a company’s balance sheet, income statement, annual report, and other indicators. The in-depth review of financials is the greater part of the fundamental analysis of stocks and their underlying companies.
The annual report is perhaps the single most helpful tool in quickly assessing the state of a company’s financial performance. Publicly traded companies are required to file annual reports, which detail all of the company’s activities during the previous 12 months. An annual report will include any information that could be relevant to shareholders and others who hold some type of interest in the company. It can be as brief or as long as is needed, and some companies go the extra mile to include humorous anecdotes or other items to lighten up what can otherwise be rather dull reading.
While an annual report gives a wide view, other financials such as the company balance sheet shine a more piercing light on specific numbers and what they mean. A balance sheet includes three parts: all of the company’s liabilities, its assets, and ownership equity. Liabilities may include debt or operating costs, whereas assets include things such as accounts receivable and inventory. The third part, equity, is simply whatever value is left once the liabilities have been subtracted from the assets. This is also known as the company’s net worth.
Related to the balance sheet and somewhat simpler, is the company’s income statement. It shows what a company has earned, as well as the expenses it has incurred over the course of the year. The income minus the expenses equal the net operating income, which is a very important piece of information to know when evaluating a company’s financial health.
Another part of a company’s financials which is less well-known is the value of its earnings before interest, taxes, depreciation, and amortization (EBITDA). Whether the EBITDA is actually a valuable measure of anything is a subject of debate, since it basically means a company’s net earnings before certain fixed expenses are taken into account. It has some value in private equity transactions, because the values it omits would change under new ownership. However, it is often considered to hold little real meaning for the individual investor, or even for many institutional investors.