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Interpreting Financial Statements
Financial statements answer three questions:
- Income statement: Is the company profitable?
- Balance sheet: Is the company solvent?
- Cash flow statement: Is the company generating real cash?
Income Statement: The Engine
Start with revenue and margins:
- Revenue growth trends
- Gross margin stability
- Operating income vs net income
Balance Sheet: The Safety Check
Look at:
- Cash vs debt
- Total liabilities
- Whether equity is growing
Cash Flow Statement: The Truth Serum
Compare net income to cash from operations:
- If earnings rise but cash flow doesn’t, dig deeper.
Free cash flow (FCF) helps explain whether the business can fund growth and return capital.
A Simple Workflow
- Income statement for profitability
- Balance sheet for leverage
- Cash flow for reality check
Summary
The goal isn’t to memorize every line item. It’s to build a coherent story about profitability, resilience, and cash generation.