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Will learning how to read financial statements really give investors a significant edge? From your experience, is it worth the time to pick up this tool?

Edit: Thanks for all the feed back guys. I wish I can mark all your answers since you all give a different perspective to my question. From what I gather, reading financial report is important to gain a deeper understanding of a company. It's a pity how lay investors generally perceive it as a monolithic artifact that's hard to grasp. I'll take all of the advices here and see where that takes me.

  • I recommend the book The Secret Language Of Financial Reports by Mark E Haskins. It's a very easy to read book,that still teaches a lot about financial statements. – chrisfs Feb 1 '11 at 9:18
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Reading financial statements is important, in the sense that it gives you a picture of whether revenues and profits are growing or shrinking, and what management thinks the future will look like. The challenge is, there are firms that make computers read filings for them and inform their trading strategy. If the computer thinks the stock price is below the growth model, it's likely to bid the stock up. And since it's automated it's moving it faster than you can open your web browser.

Does this mean you shouldn't read them? In a sense, no. The only sensible trading strategy is to assume you hold things for as long as their fundamentals exceed market value. Financial statements are where you find those fundamentals. So you should read them. But your question is, is it worth it for investors? My answer is no; the market generally factors information in quickly and efficiently. You're better off sticking to passive mutual funds than trying to trade.

The better reason to learn to read these filings is to get a better sense of your employer, potential employers, competitors and even suppliers. Knowing what your margins are, what your suppliers margins and acquisitions are, and what they're planning can inform your own decision making.

  • An informed investor should still periodically review their goals, and reevaluate the balance of investments they need to get there, since this changes over time. Additionally they should review their investments to ensure they are getting the performance and diversity that they want. Rebalancing and perhaps shifting funds is often prudent. But yeah, financial statements are a mixture of boring numbers mixed with outright fantasy. – Xalorous Aug 26 '16 at 0:48
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Financial statements provide a large amount of specialized, complex, information about the company.

If you know how to process the statements, and can place the info they provide in context with other significant information you have about the market, then you will likely be able to make better decisions about the company. If you don't know how to process them, you're much more likely to obtain incomplete or misleading information, and end up making worse decisions than you would have before you started reading. You might, for example, figure out that the company is gaining significant debt, but might be missing significant information about new regulations which caused a one time larger than normal tax payment for all companies in the industry you're investing in, matching the debt increase. Or you might see a large litigation related spending, without knowing that it's lower than usual for the industry.

It's a chicken-and-egg problem - if you know how to process them, and how to use the information, then you already have the answer to your question.

I'd say, the more important question to ask is: "Do I have the time and resources necessary to learn enough about how businesses run, and about the market I'm investing in, so that financial statements become useful to me?" If you do have the time, and resources, do it, it's worth the trouble. I'd advise in starting at the industry/business end of things, though, and only switching to obtaining information from the financial statements once you already have a good idea what you'll be using it for.

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Wow,

I cannot believe this is a question. Of course reading the 10Ks and 10Qs from the SEC are incredibly beneficial. Especially if you are a follower of the investing gurus such as Warren Buffett, Peter Lynch, Shelby Davis. Personally I only read the 10K's I copy the pertinent numbers over to my spreadsheets so I can compare multiple companies that I am invested in. I'm sure there are easier ways to obtain the data. I'm a particular user of the discounted free cash flow methodology and buying/selling in thirds. I feel like management that says what they are going to do and does it (over a period of years) is something that cannot be underestimated in investing. yes, there are slipups, but those tend to be well documented in the 10Qs. I totally disagree in the efficient market stuff. I tend to love using methodologies like Hewitt Heisermans " It's Earnings that Count" you cannot do his power-staircase without digging into the 10Qs. by using his methodology I have several 5 baggers over the last 5 years and I'm confident that I'll have more. I think it is an interesting factoid as well that the books most recommended for investing in stocks on Amazon all advocate reading and getting information from 10Ks.

The other book to read is Peter Lynch's one-up-wall-street. The fact is money manager's hands are tied when it comes to investing, especially in small companies and learning over the last 6 years how to invest on my own has given me that much more of my investing money back rather than paying it to some money manager doing more trades than they should to get commision fees.

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I agree with @STATMATT. Financial statements are the only thing that Warren Buffett & Charlie Munger read.

To answer your question though, really depends on what type of investor you are and what information are you trying to extract.

It is essential for the Buffett style (buy & hold). But if you are a short term or technical investor then I don't see it being of much value.

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Yes, especially if you are a value investor.

The importance and relevance of financial statements depends on the company. IMO, the statements of a troubled "too big to fail" bank like Citibank or Bank of America are meaningless. In other industries, the statements will help you distinguish the best performers -- if you understand the industry.

A great retail example was Bed, Bath and Beyond vs. Linens and Things. Externally, the stores appeared identical -- they carried the same product and even offered the same discounts. Looking at the books would have revealed that Linens and Things carried an enormous amount of debt that fueled rapid growth... debt that killed the company.

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Reading and analyzing financial statements is one of the most important tasks of Equity Analysts which look at a company from a fundamental perspective.

However, analyzing a company and its financial statements is much more than just reading the absolute dollar figures provided in financial statements: You need to calculate financial ratios which can be compared over multiple periods and companies to be able to gauge the development of a company over time and compare it to its competitors.

For instance, for an Equity Analyst, the absolute dollar figures of a company's operating profit is less important than the ratio of the operating profit to revenue, which is called the operating margin.

Another very important figure is Free Cash Flow which can be set in relation to sales (= Free Cash Flow / Sales).

The following working capital related metrics can be used as a health check for a company and give you early warning signs when they deviate too much:

You can either calculate those metrics yourself using a spreadsheet (e.g. Excel) or use a professional solution, e.g. Bloomberg Professional, Reuters Eikon or WorldCap.

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