A quick an easy guide about Financial Statements For investor

All listed Companies are required to publish a quarterly & annualized update on their financials. There are 3 Financial Statements that you need to know!

  1. Balance sheet
  2. Income statement
  3. Cash flow statement

Each statement provides us with different insights about the company. Reading them together would with provide us the actual financial health of the company.

Before you click away

I am not going to talk about the details of “Principles of Accounts”. That Job belongs to your accountants. But instead, I am going to try to explain:

  1. The purpose of the financial statement 
  2. What does the financial statement capture?

#1 Balance Sheet

A balance Sheet is just a formal record of what the company “Owns(Assets)”, “Owes(Liabilities)”, and the “injected capital that was used to buy/start the business(Equity)”.

What is the purpose of a Balance Sheet?

As you might have seen this famous formula, 

“Total Assets= Total liabilities + Equities.”

Every company has a general ledger to record the value of any transaction made during the fiscal quarter or year. 

What the balance sheet capture is the FINAL Value of all the changes made to assets, liabilities, and shareholder’s equity made within the fiscal period. With just the information on the balance sheet, we are able to know “Debt to Equity ratio” & “Book value” 

What does the Balance sheet capture?

The figure above shows us a generic example of a balance sheet. Different companies would include different items that are relevant to its business. 

#2 Income statements

An Income statement is also known as the profit or loss statement. Because it shows the revenue and expenditure of businesses for a duration of time.

What is the purpose of an “Income Statement”?

The purpose of the income statement is to highlight the

  1. contribution made by different revenue streams of a company’s business operation
  2. The various expenditure required to operate the business at its current status quo. 
  3. Profitably of the business. 

With just the income statement, we can find and plot trendlines with

  • Operating margin and profit margin
  • EBITDA
  • Net income(Earnings)
  • COGS
  • Marketing & Sales
  • R&D expense
Take note:

Investors should get the historical data from the income statement to plot out a trend line to gauge the “wellness” of the business.

What does the Income statement capture?

#3 Cash flow statements

The cash flow statement records all CASH ONLY transactions the company has made over the fiscal period. It doesn’t take  Accounts receivable & payable into consideration.

What is the purpose of the Cash flow statement?

The purpose of the cash flow statement is to highlight the movement( inflow or Outflow) of cash from operating the business in a fiscal period. There are 3 channels of cash flow activity.

    1. Operational cash flow
      Indicates the amount of Cash the business generates. There are two methods of calculating operating cash flow, the direct method & Indirect method(use more commonly)
    2. Investing activities
      includes the acquisition and disposal of long-term assets and other investments not included(E.G buying or selling PPE) in cash equivalents. The aggregate cash flows arising from obtaining and losing control of subsidiaries or other businesses are presented as investing activities.
    3. Financing activities
      Generating cash through bonds, loans, or sale of Equity.
      Repayment of loans, bonds, and their interest would also be reflected here.

What does the Cash flow statement capture?

Foot Notes

Foot notes give context and information about the financial statements. Usually Very important details are buried here!

Why Foot notes in  Financial statements are important?

Usually early signs of red flags are buried here.