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How to Read and Quickly Analyze Financial Statements?

Content Source + Images: Brian Feroldi


Every company (small or big) has 3 financial statements, wherein each answers a specific/unique question:

  1. Balance Sheet: What’s your net worth?

  2. Income Statement: Are you profitable?

  3. Cash Flow Statement: Are you generating cash?

The 3 Financial Statements

How to Read the 3 Financial Statements?


Please read this dummy guide for details, it helps even if you have no finance background. Skip and read further, if you already know this.



How to Quickly Analyze the 3 Financial Statements?

How to Quickly Analyze the Financial Statements?


1. Balance Sheet


This tells you a company’s net worth at a specific point in time.

How to Read the Balance Sheet?

What should you focus on here?

  • Cash & Equivalents: How much?

  • Debt: How much debt vs. cash?

  • Goodwill: How much in value?

  • Retained Earnings: Positive?

  • Receivables & Inventory: How much?

How to Quickly Analyze the Balance Sheet?

Ideal Answers:

  • Cash & Equivalents: More than Debt

  • Short & Long-Debt: None

  • Goodwill: Zero

  • Retained Earnings: Positive

  • Receivables & Inventory: None



2. Income Statement


This tells you if a company is “profitable” or not during a period of time.

How to Read the Income Statement?

Always look at 2 income statements with comparable periods.

How to Quickly Analyze the Income Statement?

What should you focus on here?

  • Revenue: Up or down?

  • Gross Profit: Up or down?

  • EPS (Diluted): Positive or negative?

  • Shares Outstanding: Up or down?

  • Operating Expenses: Up or down?


Ideal Answers:

  • Revenue: 30% / more

  • Gross Profit: 30% / more

  • EPS: Up 30%

  • Shares Outstanding: Down 4%

  • Operating Expenses: Stable



3. Cash Flow Statement


This tells you how cash moves in and out of a business over a period of time.

How to Read the Cash Flow Statement?

What should you focus on here?

  • Operating Cash Flow (OCF): Positive or negative?

  • CapEx (Capital Expenditure): More or less than OCF?

  • Net Non-cash Charges (NCC): Any big numbers? Any Stock-based Compensation (SBC)?

  • Stock: Issuance or buybacks?

  • Debt: Borrow or repay?

How to Quickly Analyze the Cash Flow Statement?

Ideal Answers:

  • OCF: Positive (and Growing)

  • CapEx: Much less than OCF

  • NCC: Nothing noteworthy + Low SBC

  • Stock: Buybacks?

  • Debt: Repayments?


Summary

Accounting (and investing) is filled with nuance. Still, with a quick analysis of each financial statement, you can quickly identify a company's strengths and weaknesses.

I’d never make an investment decision without MUCH more analysis than this.

 
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