Question

Any company in the U.S. that plans to issue stocks or bonds is required by the Securities and Exchange Commission to provide its balance sheet and income statement to the public. Why is this requirement in place? What kind of information that would be useful to potential investors can be found in these financial statements? Explain in detail.

My professor ask that the responses be at least two paragraphs long, but encourages we write more than that. Can someone who is knowledgeable in this subject please help?

Answer 1

Balance sheet and income statements are required to be disclosed by the company to the public, because it helps the different investors to assess the financial health of the company before making an investment in that company using equity or bonds. These financial statements reveal the financial health using the different ratios. It reveals liquidity position, operating profits, return to the existing shareholders and other important ratios that explain the hidden secrets of the company.
The first ratio is the liquidity ratio that explains the ability of the company to pay the short term liability and it can be calculated by using the data of current asset and current liabilities. Once the liquidity ratio is calculated, then it is compared with the industry average. If the value of the ratio is higher than the industry average, then it is good for the investors who want to buy bonds in the company. A good liquidity ratio helps the investors get confident that they will get timely interest or coupon payment.
The second important ratio is earning per share. It uses the data of net income and the number of share already issued. It tells that how much earning is already delivered by the each share. A good earning per share is an encouraging sign for the investors who want to buy equities. So, it is an important ratio for the prospective equity investors. The third data figure is operating expenses. If operating expenses are taking more than that of the revenue from the industry average, then it is a warning sign and investors should go for the further investigation and assessment of the financial data.
Further, the public should also go for ratios such as gross profit margin, net profit margin, PE ratio, sales to asset ratio as well as price to sales ratio to judge the company. It makes investment to be a safe perspective.