At the very least, it will help you to gain a better appreciation of what others are writing about the companies in which you are interested. And as your knowledge deepens you will find yourself able to make some pretty bold forecasts about a company s prospects, based on intense number-crunching. The point of financial analysis is to try to predict the future performance of a company, which means there are limits. As we have seen, all the analysis by some of the world s top economists was unable to predict the recent Asian economic implosion. So be aware that there are some pretty important limitations to what you can expect from financial analysis.
Investors buy shares based on all kinds of information about a company.
For example, it may be that a particular firm has invented a new drug, or is a takeover candidate, or has started exports to a boom region of the world or has discovered new seams of gold. Any of these factors may be sufficient to give the shares a big short-term boost. But, despite all this, it is important to realise that profits are the key to a company s long-term performance. Without profits a company cannot invest in growth, cannot repay loans and cannot pay dividends. Eventually its very survival may be in doubt.