Reading Company Financial Statements
Reading Company
Financial Statements
Reading Company Financial Statements
Learn to interpret a company's financial health through its reports.
Public companies are required to publish three core financial statements that help investors analyze performance, profitability, and risk.
The Income Statement shows the company's revenue, expenses, and net profit over a specific period of time (usually quarterly or annually).
Key Line Items:
Revenue (Sales): Total money earned from selling products/services
COGS (Cost of Goods Sold): Direct costs of producing goods
Gross Profit: Revenue - COGS
Operating Expenses: Salaries, rent, marketing, R&D, etc.
Operating Income: Gross Profit - Operating Expenses
Taxes & Interest: Money paid to lenders and government
Net Income: Final profit
Tip: A growing revenue and net income across quarter and annual reports is a healthy sign. Watch out for shrinking profit margins.
The Balance Sheet is a snapshot of a company's financial position at a single point in time.
It follows the formula:
Assets = Liabilities + Shareholders' Equity
Assets:
- Includes cash, inventory, accounts receivable
- Reveals how much the company owns
Liabilities:
- Includes loans, unpaid bills, bonds, accounts payable
- Reveals the company's debt and obligations
Shareholder Equity:
- Includes capital stock, retained earnings
- Reveals the "book value" of ownership
Assets:
- Includes cash, inventory, accounts receivable
- Reveals how much the company owns
Liabilities:
- Includes loans, unpaid bills, bonds, accounts payable
- Reveals the company's debt and obligations
Shareholder Equity:
- Includes capital stock, retained earnings
- Reveals the "book value" of ownership
Tip: If liabilities > assets, the company's finances are at risk.
A business can look profitable on paper but still run out of cash. The Cash Flow Statement of a company tells the real story of cash inflows and outflows.
Operating Activities:
- Tracks day-to-day business (net income + adjustments)
- Main cash source
Investing Activities:
- Tracks the buying/selling of assets (equipment, real estate)
- Growth Spending
Financing Activities:
- Tracks the borrowing of money, issuing of stock, and paying of dividends
- Funding & Return to shareholders
Tip: Always check if the Operating Cash Flow (OCF) is consistently positive and greater than Net Income. If OCF is negative or significantly lower than net income, the company's profits may not be backed by real cash as a result of delaying payments, aggressive accounting, etc.
The Income Statement shows PROFITABILITY.
The Balance Sheet shows FINANCIAL STABILITY.
The Cash Flow Statement shows LIQUIDITY.
