How do you read and analyze a financial statement?
submitted by jemma

scott

If you're just beginning, here are two things to get you started:

The income statement shows how the company performed over time. Did they make money, or did they struggle?

Then the balance sheet is a snapshot of what they own vs. what they owe.

Reid

You can start at looking at the last accounting period to see how a company performed, but then you'll want to get more depth. You do this by comparing past accounting periods. It will give you a big picture view of the company because you can spot trends. For example YoY (year over year). You can look at revenue this year compared to last year and say, "We had a 15% increase in revenue, YoY." You can keep zooming out and see if that's a trend that continues. Has the company been increasing revenue for the last 5 years? That's important to note.

jenson

Here's a tip: just because a company has a lot of assets doesn’t mean it’s doing great. You have to look at how their assets are being used. As in, are they generating decent returns? To do that, you'd need to look at return on assets (ROA) and return on equity (ROE).

sptzer_89

Start with the big ones, which would be revenue, net income, total assets, total liabilities, and equity.

Ryan R

Focus on the big picture first. Start with the balance sheet, income statement, and cash flow statement to get a sense of the company's overall health. Specifically, check out the assets versus liabilities on the balance sheet to see if they’re in a strong position. Next, you can look over the income statement to understand profitability.

Ellsworth

Of course you'll want to start with looking at spending and revenue for several periods. You can see if you're headed the right direction, generally speaking. After that though, you'll want to dive into ratios.

If you're not familiar with the ratios, get familiar. Those are like shortcuts to see how a company is doing. You've got liquidity ratios, like current ratio and quick ratio, as well as profitability ratios like net profit margin and return on assets. Gather those and then compare them against industry benchmarks, since each industry has different norms and expectations.

jamie

Another tip I’d add is to pay attention to any notes with the financial statements. Sometimes there are extenuating circumstances, like natural disaster and other unpredictables. The numbers alone don’t tell the whole story.

There might be inflation because of something going on in the country. If that's hurt a company's sales, they'll want to note that, because investors can consider that the decline is only temporary until inflation resolves.

Jake

It can be insightful to compare the financials of one company with its competitors. You'll be able to see where you stand against the industry. If their profit margins are significantly lower than industry averages, it might mean there are higher production costs, or maybe pricing issues. You might find higher-than-average efficiency, which would be a good sign that management is holding it down.

Chittles

Learn the 3 main parts:

The Balance Sheet - which shows a company's financial position by listing assets, liabilities, and equity

The Income Statement -- which details revenues, expenses, and net profit

The Cash Flow Statement -- which tracks the inflow and outflow of cash, just like it sounds