Do Your Homework
Everyone agrees on the importance of “doing your homework” before investing in a company. But what does this advice really mean, and how does an investor follow it?
The aim of this service is to answer these questions by providing an advanced overview of financial statement analysis. In the United States, a company that offers its common stock to the public needs to file periodic financial reports with he Securities and Exchange Commission (SEC). These reports, income statement, cash flow statement and balance sheet paint a picture of the financial health of that company. They are based on Generally Accepted Accounting Principles (GAAP). Because the conceptual framework is general, it receives interpretation, and often re-interpretation. Consequently, sitting on top of this framework is a growing pile of literally hundreds of accounting standards and complexity in the rules is unavoidable.
The goal of all companies is to create value for the shareholder. But how is value measured? The performance metric we use to evaluate performance is Economic Profit. Economic Profit is based on classic financial theory and is not entirely different from traditional free cash flow measures. The conceptual pillar to support economic profit is the fact that access to equity capital is an expense and is not free. The company does not create value until a threshold level of return is generated for shareholders after the cost of equity capital is deducted. A company can earn an accounting profit (net income) but not necessarily an economic profit.
Economic profit boils down a set of adjustments that translate an accrual-based earning (net income) into a cash-based earning. The idea is simple but rigorous, true profits should account for the cost of capital. This is exactly how companies make internal decisions to allocate their own limited resources based on money generated versus money invested. Successful companies do not make internal decisions how to allocate their own resources based on net income but rather on an economic profit basis. This service offers you the opportunity to invest the same way successful companies invest.
Doing your homework is asking yourself the question – why should I invest in a company that does not create value for its shareholders capital? First before you invest use our service to “do your homework”.