(May 23, 2011) Today, no business is untouched by cut throat competition. That’s why, firms, in order to increase their revenues, EPS, ROE, look out for constant innovation. Good companies constantly alter their business models, operations’ management to stay above the competition. Nonetheless, changes and experimentation entails both opportunities and risks. While a good move will see the shareholder’s value multiply in the future, a slightly bad calculation can destroy it.

 Therefore, Investors should carefully review the financial statements that help in answering whether the company is heading towards the right direction or not. For instance, the Management Discussion & Analysis(MD&A)-a section of a company's financial statements, in addition to the 10-K, 10-Q and proxy statement (which are filed with the SEC) help in getting  better idea of management's view on the opportunities and risks for the company along with its current performance. 

 Management’s Interpretation answer important questions like: is there optimism or doubt among the executives concerning the future growth/projects of the company. Similarly, it helps in finding out whether the company is contemplating any big acquisition or sales of asset which might impact the future streams of revenues. Besides, these statements are precursor of solvency and financial standing of the firms. It helps us in understanding whether the company’s credit is in good shape or not (long term profitability and growth can be severely impacted if the cash flow is negative for a prolonged period)

The bottom line: Financial statements include wide raging issues that support investor’s decision process. With the help of these statements, we can detect, and/or try to dig in the past all the company had said pertaining to its investing decisions, its business strategy, thereby, concluding the fundamental strength of the company and inner workings of the company.