Is It Advisable to Evaluate a Company's Financial Statements When Considering an Investment or Purch

Importance of Evaluating Financial Statements for Potential Investors or Buyers

Thread:
Thread must be 500 words and demonstrate course-related knowledge. The thread must include a Biblical Scripture and the referrence and at least 2 scholarly, peer-reviewed sources, plus the course text from your electronic text book (provided below), all in current APA format. All Of These Details Are So Important!

Topic:
As a potential investor in a firm or perhaps the buy of a particular business, would it be advisable for you to evaluate the company’s financial statements? Why or why not? What key information would you seek from a firm’s financial statements?

Reply:
You will reply to two students with scholarly input.  each reply will must be 350 words.  each reply to each student must include 1 biblical Scripture and the reference and at least 1 scholarly source, plus the course text from your electronic text book (provided below), all in current APA format.  Do Not Reply As If You Are Grading Them.  All Of These Details Are So Important For Each, Again, Each Reply!  You will reply as if you are saying you enjoyed reading their reply and would like to add additional insight and give additional input by adding other support and 2 scholarly sources as mentioned above.  You will speak to them as if you are having a DIRECT CONVERSATION WITH THEM.  An example would be “GRACE, I read your thread and I enjoyed what you had to say especially regarding …… I would also like to add to that by saying

Reply To Student #1

As a potential investor or buyer, it is important to analyze the value of the business you are looking to acquire. It is not just about the product but how well the business has performed over the years. A key factor in learning this information is the company’s financial statements. The financial statements will provide you with the balance statement, the income statement and the statement of cash flows. This helps show the company’s profits and losses over time allowing you to project a valuation of the business.  Nickels, et al. (2019) describes the financial statements as indicators of a firm’s financial health and stability (p.440). God teaches us in Proverbs with verses regarding your business and how you should work. Proverbs 21:5, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty (ESV)”. God is telling us we must be diligent but careful when building our business. It can take years to see some success. If we go for quick success without careful review, we may find ourselves with a quick failure. While addressing the need for comparability in acquisition decisions, Chen et al. (2018) stated “Publicly available financial statements are a vital source of information used in screening and valuing potential targets. Specifically, we posit that comparability improves merger and acquisition outcomes because it helps acquirers understand and predict future cash flows and future earnings, lowers the cost of acquiring information, and makes it easier to value the target.”

Key Information to Seek from a Company's Financial Statements

Financial statements will also be a vital source under circumstances you not to obtain a loan for your investment. Banks will review the acquired firm’s financial statements and rate the risk factor of the borrower. According to a study completed by Minnis, M., & Sutherland, A. (2017) when bankers determined that low-risk borrowers possessing longer track records without default require little monitoring because they want to protect their earned reputations. Borrowers that the bank perceives as high-risk (either because the firms lack a track record or have a history of default) do not have a positive reputation to lose (p.11).

In summary, to determine the estimate of a business’ value and predict future earnings, it is important to gather as much information from the financial statements as possible to make a wise investment.

Reply To Student #2

When corporations reach a point where additional funds are needed for growth, one option used to obtain these funds is an IPO where funds are received in return for part of the ownership, equity, in the corporation. This ownership is signified by owning stock in the corporation. As Nichols points out, “Buying stock makes investors part owners of a company. This means that as stockholders they can participate in its success. Unfortunately, they can also lose money if a company does not do well or the overall stock market declines.” (Nickels, 2019, p. 502)

Investing in a corporation can be achieved through different financial instruments. Stocks in corporations are traded on different exchanges. In addition, stocks of different companies can be combined with other financial instruments and sold through mutual funds. As explained by Nichols, “A mutual fund is like an investment company that pools investors’ and then buys stocks or bonds (for example) in many companies in accordance with the funds specific purpose.” (Nickels, 2019, p. 506)

Additional financial instruments available to investors are exchange-traded funds, (EFTs). “They are a collection of stocks, bonds, and other investments that are traded on securities exchanges, but are traded more like individual stocks than mutual funds.” (Nickels, 2019, p. 506) Unlike mutual funds, EFTs are traded throughout the day through brokers. Mutual funds can only be purchased at the end of each trading day.
As noted by Nichols, investing in the stock of a corporation has inherent risk. Stockholders are owners of the corporation and therefore subject to all of challenges facing the corporation including industry sector factors affecting profitability, staffing shortages and changes in the tax environment. All of these factors can affect the profitability of a corporation and therefore the investment value of the stock.

Mutual funds and ETFs offer alternatives to investing in an individual company stock. Both mutual funds and ETFs bundle investment instruments together and, by doing so, mitigate the risk associated with investing in only one corporation. Both mutual funds and ETFs have a strategy underlying the bundle of investment instruments that are bundled together under them. In addition, mutual funds are professionally managed. ETFs are not actively managed but are usually more focused on an industry segment.