Financial statements- Reading

 To read financial statements, understand the balance sheet, income statement, and cash flow statement, and the notes to the financial statements. Analyze these statements by looking for trends across periods, understanding key ratios, and checking for consistency to get a comprehensive view of a company's financial health, profitability, and cash management.

The Three Main Financial Statements 1. Balance Sheet: a. What it shows: A company's financial position at a specific point in time, detailing its assets (what it owns), liabilities (what it owes), and equity (owner's stake). b. Key equation: Assets = Liabilities + Shareholders' Equity. c. How to read it: Look at the types of assets and liabilities to understand liquidity and long-term debt. 1. Income Statement (P&L Statement): a. What it shows: The company's profitability over a period, summarizing revenues earned and expenses incurred to arrive at net income (profit). 2. Key elements: Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, and Net Income. 3. How to read it: Track trends in revenue and expenses to understand how the company is performing. 3. Cash Flow Statement: a. What it shows: The movement of cash in and out of the company from its operating, investing, and financing activities over a period. b. How to read it: See if the company generates enough cash from its core business to cover its costs and investments. Additional Important Sections Notes to the Financial Statements: These provide critical details on the accounting methods used, assumptions, and other information that clarifies the numbers in the main statements. Key Steps for Analysis 1. Review the Annual Report: Financial statements are typically found within the company's annual report, which also includes the Management Discussion & Analysis (MD&A) and information about business strategies and risks. 2. Understand Business Context: Before diving into the numbers, understand the company's operations and overall strategy. 3. Analyze Trends: Look at financial statements over several periods (years or quarters) to identify trends in profitability, expenses, and other key metrics. 4. Use Ratio Analysis: Calculate and analyze financial ratios (like return on assets or current ratio) to evaluate the company's profitability, efficiency, and financial strength. 5. Check for Consistency: Ensure that the figures across the different statements are logical and consistent.