hidden gaps in accounting data
Limitations of Accounting Data
A company’s Accounting information only reveals about 85% of the activities taking place in that company.
A successful investor not only looks at the numbers but also at the intangible assets, upcoming projects, and company distribution.
Here are some of the things that an investor should look into after looking at a company’s financial statements.
Management
Changes in CEO, CFO, etc can cause fluctuation in the stock price of a company. Professional management is crucial for any company’s growth.
Study the company’s history and its management and understand the reason, ideology, and vision of a company before buying it.
The decisions of the management should be scrutinized by you as an investor.
For example – Understanding Coca-Cola’s history, formula, and future growth options is necessary before buying it.
Brand value and Authority
Brand value is not accounted for in the financial statements as it does not have a numerical value attached. However, it helps us ascertain the company’s value in its customers’ minds.
One should look for the price of the company’s product and the quantity demand for that product. If both these numbers are high, we can conclude that people are buying that product not just for its benefits, but also for the brand association.
Example – iPhone – premium price and millions of phones are sold yearly
software and other assets
The intangible assets of a company are usually not properly accounted for. They are of great value and should be looked at.
For example – Millions of people visit Amazon’s website every day which is a key component for making sales. It also shows the value of their brand and website.
distribution and r&d
A company’s distribution is often not looked upon. Distribution signifies
- Several customers a business gets.
- Wholesalers it is connected with.
- Geographical area a business covers.
It should be studied as it describes the kind of reach, customer loyalty, and market position it has.
Research and development of new products should also be noted as it tells us about any future products/innovations.
FUTURE GROWTH
Knowing the future strategies of a company can help an investor ascertain if the company is aiming for growth. This can be found in annual and quarterly reports.
Signing of new projects can increase the stock price of a company.
For example, Oracle’s share price doubled because it signed a new deal.
