Financial statements are documents intended for investors to give them an idea of how a business performs over a given period. Financial statements answer essential questions investors should ask before buying shares, such as:
- How does a company make money?
- Are your business revenues and profits up or down?
- How much and what does the business own?
- How much debt does the business have?
- What is the inflow of new money into the business?
To answer these questions, I suggest reading this article on the three main types of financial statements to understand what investors should pay close attention to. There are three primary financial statements that investors need to know: the income statement, the balance sheet, and the cash flow statement.
Profit and Loss Statement (Income Statement)
An income statement tells you how much money the company receives and how much profit is made from that income.
- Revenue (Revenue/Sales): The first significant number on the income statement is the net sales or revenue of the company. This is the top line in the report. In many cases, a company’s income statement will break down the various sources of income. For example, Apple’s (NASDAQ: AAPL) income statement divides revenue into sales of products and services.
- Net Income: The Company’s cost of sales is then subtracted to arrive at its gross profit. Operating expenses (such as research and development) are deducted to calculate operating income. The income tax expense is then removed, resulting in the company’s net income. Net income is often expressed in both one considerable number and in terms of shares (the latter is earnings per share or EPS).
Depending on the company, there may be other information on the income statement, such as sales by region or product category. Here is an example of the regional breakdown from Apple’s 2021 annual report.
It’s also worth noting that the income statement usually has several columns of numbers to show how the current period compares to the same period last year. Typically, the previous quarter is compared with the same quarter a year earlier. The calendar year before the current date or the company’s full year is compared with the same period of the previous year. Comparing a company’s current income to the last year’s income gives a good indication of how the business is growing.
- Balance sheet: The balance sheet depicts a company’s financial situation at a specific point in time, generally the conclusion of a quarter. As with the income statement, the data is usually presented to compare the current period and the same time a year earlier.
The balance sheet consists of three sections:
- Assets (what the company owns) are divided into current and non-current assets. Existing assets include liquid assets and assets expected to become liquid during the year: cash, short-term treasury bills, receivables, and inventories. Non-current assets include long-term investments, real estate, and equipment used in production, to name but a few.
- Shareholder’s equity is the difference between assets and liabilities and the company’s net value. Equity is what a company would have left if it closed, sold all its assets, and paid off its debts.
- Cash Flow Statement: A company’s cash flow statement shows the cash flows in and out of business. It is divided into several categories:
- Operating activities: This includes the net income from the company’s business, stock compensation, receivables received, payables paid, and other items related to the business.
- Investing activity: If a company buys or sells stocks or bonds, that training is included in this part of the cash flow statement. The same applies if a business buys or sells real estate or equipment.
- Financing activities: If a company issues new ordinary shares, they are included in this part of the cash flow statement. And if the company repays the debt, it will also be displayed here. Dividend payments are standard in this section, as are share buybacks.
A positive number indicates that the company’s cash increased during the reporting period, while a negative number indicates that the company’s cash decreased. The sum of all these categories gives the company’s total cash flow. Just below full cash flow is usually the actual cash and cash equivalents currently held by the company.
Where Can I Find the Financial Statements?
Many companies put their latest results in the spotlight on their main IR page. Go to the company’s page in the Investor Relations section and open the latest quarterly report, which is usually found in the “news,” “press releases,” or “financials” tab at the top of the page. You can get the company’s financial statements directly on the company’s website.
The bottom line is that financial statements are full of information, updated quarterly, and easily accessible for all publicly traded companies to help investors like you make informed decisions.
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