How to Analyze Stock Financials for Investment Success

Income Statement Formatted Excel

Analyzing stock financials is a key part in making good investment decisions. The financial statements usually reflect how a company is performing and how realistic it is for the company to achieve a set of objectives. However, being able to analyze stock financials effectively takes time and knowledge. After reading this article you’ll know what to look for in financial statements and how that relates to making a better investment decision.

Where do I get stock financial statements?

There are many ways in which you can get a company’s financial statements. Some of the ways include checking a site like Yahoo Finance or a company’s 10k (annual) or 10q (quarterly) reports. In this guide, we will be using Wisesheets to get the company’s financial statements directly on your Excel or Google Sheet spreadsheet so you can easily perform your analysis.

There are two ways in which you can get stock financials.

Data dump

Simply enter the ticker you are trying to get the stock data from, select annual or quarterly, and you will get all of the company’s financials and key metrics on different tabs of your spreadsheet.

Statement Dump

Wise Function

If you are looking for specific financial data points or key metrics for your models. You can also get them very quickly using the =WISE function:

The function accepts the following arguments:

=WISE(ticker, parameter, year or ttm, [quarter])

The list of parameters includes everything in the financial statements, key metrics, and growth metrics which you can see here.

Once you have a model set up using the function you can simply change the ticker and get all of the financial data you need at once without wasting any time copy-pasting financials from multiple websites.

Wisesheets data model

Now that you can easily get company’s financials, let’s learn how to begin our analysis.

The Income Statement

The income statement is designed to capture the financial results of a company in a period of time. Note that the expenses and revenues recorded are not necessarily what the business received or paid during that period, but rather the revenue it earned and expenses it incurred. This is where accounting rules come into place. Luckily all publically traded companies follow IFRS so their accounting methods are very similar.

Let’s use Apple as an example 

Apple Income Statement

As you can see the first section of the income statement is revenue and then everything else that follows is a different type of expense.

Fundamentally, revenue is very important. Without enough revenue, the business will not be able to cover its expenses and keep operating.

Types of Expenses

Cost of Revenue

Cost of revenue is the direct cost associated with the generated revenue that the company reported.

From this number, the gross profit can be calculated by taking the revenue – cost of revenue/revenue

Operating Expenses

These expenses are incurred during the reported period and can be directly attributed to the operations of the business. These include: research and development (researching new opportunities and technologies), general and administrative expenses (paying the salary of the business employees and management), and selling & marketing expenses (paying for marketing and other costs associated with the promotion of the company’s products and services).

Depreciation, Amortization, Interest and Taxes

The next set of expenses includes the business depreciation (splitting the lifetime value of a tangible asset like a building), amortization (splitting the lifetime value of an intangible asset like a patent), and interest expenses associated with any loans and the respective taxes the company must pay the government to operate.

After deducting all these expenses, the net income is derived. Net income is essentially the profit or loss the business accrued during that period. From here the net income ratio can be calculated by taking the net income and dividing it by the revenue. This number essentially tells you, "for every dollar generated by the company how much is the business keeping in profit?".

Analysis Factors

Revenues, Gross Profit and Net Income

The first is to compare the previous years or quarters to analyze the trend in which the numbers are going. Are these numbers increasing over time or decreasing? The answer to this question may very well be related to information you can find on the company and it’s market.

Financial Statement Trend Analysis

Individual Expense Items

Analyzing individual expenses depends on the company and it’s industry. For technology companies, an important area of focus is the research and development costs that allow the company to innovate and continue to prosper. It's important to look at the direction in which the numbers are going and the company’s expense efficiency over time. In other words, is the company spending less relative to its revenues as it grows?

The Balance Sheet

The balance sheet is a very helpful financial statement that serves as a snapshot of a company’s assets versus its liabilities. Assets include items that provide financial benefits to the company whereas liabilities are obligations that the company has to pay off.

Apple's balance sheet Excel

Assets

There are two types of assets a company can have: current assets and non-current assets. The first is a type of asset that can be more easily turned into cash while the second includes assets that are harder to sell, like a building.

Liabilities

The same concept applies to liabilities, where there are current and non-current liabilities. Current liabilities are obligations that need to be paid quickly while non-current are obligations that are paid over the long term.

Shareholders Equity

The last component of the balance sheet is the shareholders equity. You can calculate shareholders equity by taking the total assets and subtracting the total liabilities. This section tells you essentially what you own as a shareholder of the business.

Analysis Factors

Assets vs. Liabilities

One of the most important things to analyze is the assets that the business owns and whether it is tangible or non-tangible. Once you know this, determine if this asset is going up or down over time. The same concept applies to liabilities. After you understand these balance sheet sections, the next step is to compare the assets against the liabilities. This will help you understand whether or not the business can cover its obligations. This is particularly important for the current assets and current liabilities. If a business does not have enough current assets to cover its current liabilities, the business is in trouble financially. Ideally, the business should be able to cover its current liabilities at 2x or more.

Shareholders Equity

The last component you want to look at is shareholders equity. What you should look for is the direction in which the number is going. Ideally, you want to invest in stocks whose shareholders equity is growing consistently, as that generally tends to increase the stock value over time.

The Cash Flow Statement

The cash flow statement is designed to show you how the business generates and uses cash to finance itself. It is the most telling statement to see exactly where the business cash is coming from and going within a time period. The cash flow statement is divided into three sections:

Operating Cash Flow

The first section is the operating cash flow, which signifies the cash generated by the business' operating activities. This statement starts with the company’s net income, and adds or subtracts items that either increased or diminished the company’s cash. The sum of these items is what equals the net cash by operating activities.

Investing Cash Flow

The next section is the investing cash flow where the business lists the investing expenses that it had that were paid in cash as well as any gains from investments received in cash. The sum of these items equals the net cash used for investing activities.

Financing Cash Flow

The financing cash flow section is very helpful to see how the business is financing its current activities. In other words, how is it paying its debt or using debt to grow the business? Here you can see dividends paid, debt paid, share buybacks, debt raised etc. The sum of these items equals the net cash provided by financing activities.

Final Cash Section

At the end of the cash flow statement is usually a summary including the cash the company had and has, its operating cash flow, capital expenditures, and free cash flow. The sum of these items is equal to the operating cash flow minus the capital expenditures and it represents the amount the company has to repay investors, creditors, or reinvest back into the business. It is essentially what the net income would be if it didn’t include items like depreciation which don’t actually decrease the company’s cash.

Apple's Cash Flow Statement Excel

Analysis Factors

The Three Types of Cash Flows

The first thing to look at is how the three different types of cash flows are trending. For example, are the operating cash flows increasing over time? Is the company investing more cash into assets that generate a return? How is the company financing going? Are debt payments increasing or decreasing? Keep in mind that the patterns of cash flow in these different activities can tell you a lot about a company.

Free Cash Flow

The last thing to look at is the free cash flow. The ideal scenario is that year over year the company’s free cash flow grows, and that in turn helps to increase the company value.

Financial Ratios

Besides the company’s financials, you can also look at different ratios and metrics that can be very insightful. Particularly when comparing companies in the same industry or sector. Here are some of the most useful ones:

  • Pe Ratio
  • ROIC
  • Profit Ratio
  • Dividend yield
  • Currrent Ratio

If you want to learn more stock metrics, check out this article talking about them and listing their calculations and significance.

Interpretation

The last thing to keep in mind is that often times looking at the financials of only one company is not as powerful as looking at multiple companies in the same sector or industry. This helps provide additional context that can tell you why some companies are more financially efficient than others.

We hope this guide helps you make better stock investments. If you want to get company’s financials right into your spreadsheet, check out wisesheets.io – you can try it at no cost.

To your investing success,

The Wisesheets Team

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing and facilitating over a billion dollars in commercial real estate deals.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies.

That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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