Using Historical Financial Statements to Understand the Market

Now more than ever, conducting thorough due diligence is critical to evaluating a deal. With so many macroeconomic forces and geopolitical events simultaneously afflicting the market, the true value of a potential purchase starts with understanding today’s landscape. Potentially one of the most important resources for determining merit in a proposal starts with a seller’s financial statements, as these often spell out the monetary red flags a company may be trying to hide. 

Financial statements provide insights into a company’s position, profitability, and growth potential that. When analyzed together, they can reveal a stock’s value and growth prospects, financial instability, or accounting improprieties. While there is no one indicator that can adequately assess a company’s financial position, these metrics can be calculated using the figures released by a company on its financial statements.

But what specifically should you be looking for in historical financial documents? What are “red flags” and where do they hide in these documents? And how can you access them in the age of information overload? 

Below, we dive into the essentials of understanding how to leverage historical financial statements in today’s ever-shifting market.