Question

Explain a scenario whereby you might use the financial information found in the balance sheet or income statement of a company. This could be at your current or prior job, as part of a future business venture, or as an investor. Cite any references used.

Answer 1

As an investor I would look at the income statement of the company and assess its profitability. For this the profit margin as well as the operating profit margin ratios will be analysed. It will be useful to analyse the trend in the income statement so that the growth potential of the business can be assessed.

I would also look at the capital structure of the business to understand the amount of debt that it holds. This will enable me to understand the liquidity of the company as well as the risk involved in the investment. If the company holds too much debt as compared to equity it implies that it has a higher risk.