How to Analyze a Company Using Financial Statements

If you are planning to invest your money in the stock market (buy stocks), you must learn to analyze a company using its financial statements. This is a fundamental skill for any value investor.

What are Financial Statements?

Financial statements are written records that convey the business activities and the financial performance of a company. Government agencies, accountants, firms, etc. audit these financial statements to ensure accuracy and for tax, financing, or investing purposes.

The Three Main Financial Statements

Three main financial statements are used to analyze a company:

Income Statement: Shows the company's revenue and expenses during a particular period. It indicates how the revenues (also known as the "top line") are transformed into the net income (the "bottom line").
Balance Sheet: Provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time.
Cash Flow Statement: Shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

Why Analyze Financial Statements?

To evaluate the financial health of a company.
To determine the company's ability to generate cash and pay debts.
To identify trends in the company's performance over time.
To compare the company with its competitors.
To make informed investment decisions.