How to Read Financial Statements
Every listed company publishes three core statements. Together they show whether a business earns money, what it owns and owes, and whether real cash is coming in.
Income statement (profit & loss)
Shows revenue, costs and profit over a period such as a quarter or a year. Read it from top to bottom.
| Line | What it tells you |
|---|---|
| Revenue (sales) | Total money earned from selling products or services |
| Cost of goods sold | Direct cost of producing what was sold |
| Gross profit | Revenue minus cost of goods sold. Gross margin = gross profit ÷ revenue |
| Operating expenses | Salaries, rent, marketing, research and other running costs |
| Operating profit (EBIT) | Profit from the core business before interest and tax |
| Net income | The bottom line: profit after all costs, interest and tax |
| EPS | Net income divided by shares outstanding |
Balance sheet
A snapshot on one date of what the company owns and owes. It always balances: assets = liabilities + shareholders' equity.
| Section | Includes |
|---|---|
| Current assets | Cash, receivables and inventory that turn into cash within a year |
| Non-current assets | Property, equipment, intangible assets and long-term investments |
| Current liabilities | Bills, short-term debt and other amounts due within a year |
| Non-current liabilities | Long-term debt and other obligations |
| Shareholders' equity | What would be left for owners if all liabilities were paid |
Cash flow statement
Tracks actual cash moving in and out. Profit can be shaped by accounting choices; cash is much harder to fake.
| Section | What it shows |
|---|---|
| Operating cash flow | Cash generated by the day-to-day business |
| Investing cash flow | Spending on equipment and acquisitions, or cash from selling assets |
| Financing cash flow | Borrowing, repaying debt, issuing shares, buybacks and dividends |
| Free cash flow | Operating cash flow minus capital spending: cash truly available to owners |
How the three connect
- Net income from the income statement is the starting point of the cash flow statement.
- Profit that isn't paid out adds to equity on the balance sheet.
- The cash balance at the end of the cash flow statement matches cash on the balance sheet.
Red flags
- Profits rising while operating cash flow falls
- Debt growing much faster than revenue
- Receivables or inventory growing much faster than sales
- Frequent 'one-time' charges that keep recurring
- Shrinking margins year after year
Where to go next
Turn these statements into ratios like P/E, ROE and debt-to-equity to compare companies.
Educational information only, not investment advice. Market data may be delayed.
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