Resources
Reading financial statements
Three documents are enough to form a judgement on a company: the balance sheet states what it owns and owes, the income statement states what it earns, the cash flow statement states what actually comes in and goes out.
Three documents, three questions
The balance sheet answers the question of solidity: what share of assets is funded by durable resources, and what share by short-term debt. The income statement answers performance: what margin the activity generates, and where the result comes from. The cash flow statement answers the most concrete question: does the company collect what it invoices. A profit without collection describes a situation only that third document reveals.
- The balance sheet: structure of resources and uses, at a given date
- The income statement: how the result is formed over a period
- The cash flow statement: actual cash in and out
- The notes: the methods used, which explain the figures
- The ratios: profitability, structure, liquidity, compared over time
Five ratios and the decision they inform
Each ratio reads over time rather than in isolation: a single value describes a situation, a series describes a trajectory. The financial analysis block builds that diagnosis on real statements.
| Ratio | What it compares | The decision it informs |
|---|---|---|
| Operating margin | Operating profit against revenue | The model's solidity before financing |
| Financial autonomy | Equity against total assets | The capacity to absorb a hard year |
| Current ratio | Current assets against short-term liabilities | Meeting the next twelve months of due dates |
| Inventory turnover | Average stock against cost of sales | How supply levels should be sized |
| Customer payment period | Trade receivables against revenue | The collection effort to engage |
The volume devoted to analysis
- hours of financial analysis
- 220
- hours of corporate finance
- 200
- hours of management control
- 260
Adjustments, profitability, structure, flows, reasoned diagnosis.
Investment decisions, cost of capital, valuation.
Costing, budgets, variances, dashboards.
Reading questions
Which document should I start with?
With the cash flow statement, which resists accounting-method choices best: it states what came in and went out. The income statement and balance sheet are then read with that cash reality in mind.
How do I compare two companies?
Through ratios rather than absolute amounts, and across several years. The notes let you check that methods are comparable: that is the check preceding any conclusion.
What should I look at in the notes?
Valuation methods, the detail of provisions and off-balance-sheet commitments. Those three sections explain most of the differences between two companies showing apparently comparable results.
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