‘we read hundreds and hundreds of annual
reports every year’ – Warren Buffett
when asked about the secret behind his success in investing.
Most
people never choose a stock investment by themselves. They rely on their uncle
or the stock broker who seems to have figured out how the trend of Stock market
over the next year. The reality though is that the best guide to choose a stock
for investment is yourself. The underlying
requirement though is that you should have the capability to understand at the
very least the Annual Financial Statement of a company. Let us look at some of
the important Financial Keywords & where to find them in Company Balance
Sheet that any Stock Investor need to know.
Equity Capital : Money contributed by promoters and other
shareholders in return for the shares in the company plus the portion of past
profits that are retained in the company over the years
Debt Capital : Money
borrowed from banks or other Investors by issuing bonds that carries interest
charges
Total Capital : Sum of Equity capital & Debt Capital
The Total Capital can be obtained from the
Balance Sheet of a company under ‘Source of Funds’ under which ‘Shareholders
Funds’ (Equity capital) & ‘Loan Funds’ (Debt Capital) can be seen.
Net Profit (Profit after Tax): Amount that a company generates
on the Equity Capital
Interest Charges: Interest paid to lenders of the Debt Capital
The Net
Profit & Interest charges can be obtained from the Profit &
Loss statement.
Always remember
these 5 financial keywords -Total
Capital, Equity Capital, Debt Capital, Net Profit, Interest Charges. In the
next post we will be looking at how to pick stock based on the Financials (I call it as Pick It Like Buffett)
Reference
: www.shyamscolumn.com