What should investors focus on in financial statements?

ByABC News
January 13, 2012, 12:10 AM

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A: Public companies provide piles of financial information to investors. But if you don't know how to read these documents or don't know what to look for, you can quickly get buried.

Companies release all sorts of documents to investors, ranging from quarterly reports, annual reports and press releases. Digging into these statements and discussing all the elements worth examining is covered by many full-length books.

If you're interested in more detail, there are also past Ask Matt columns on the topic you might want to read.

The reason there is so much information on financial statements is because these documents are the most critical pieces of information investors will get from individual companies. Reading these documents closely is one of the best ways for investors to get a better grip on what's going on with the company to which they've entrusted their money. Ignoring these reports is akin to driving down the freeway blindfolded.

But for this column, I'll cover a few of the main highlights investors should watch for. This is by no means an all-inclusive or exhaustive list of all parts of financial reports investors should consider. Think of this as more of a basic checklist to get started.

Investors can always get free access to all public financial documents from the Securities and Exchange Commission's website. It's important to familiarize yourself with how to download and view companies' financial reports.

As you start examining statements, a few things to take a close look at include:

•Earnings and revenue growth. If you invest in a company, the most important thing is the bottom line. You want to know how much the company earns and whether it's boosting its sales. This can tell you whether a company is on a growth trajectory or in decline, key factors that determine how much the company is worth. A company's earnings and revenue can be compared with its stock price to tell you if a stock is expensive or reasonably priced.

You can get these data from the company's earnings press releases, quarterly reports (10-Q), or annual reports (10-K). These reports contain critical financial statements called the balance sheet, income statement and statement of cash flow. These three statements will be discussed in more detail below.

Regarding General Motors, the financial statements tell a story of recovery. The company reported revenue of $149.2 billion during the 12 months ended Sept. 30, 2011, according to S&P Capital IQ. That's up 10% from 2010 and up 43% from 2009. There's still room for recovery, though, as revenue is down 17% from 2007.

On the bottom line, GM reported net income of $9.9 billion during the 12 months ended Sept. 30, 2011. That's up 59% from 2010. More encouraging is the fact the company is back in the black following massive losses of $38.4 billion and $30.9 billion in 2007 and 2008.

Getting these numbers takes some work. You need to add up the data in each of the past four quarters, as well as the same quarters in the previous period, to calculate the change.