Financial statements provide a comprehensive view of a company’s financial health. They are typically divided into three core documents:
A. Income Statement (Profit & Loss Statement)
The income statement shows a company’s financial performance over a specific period (quarter, year). It reports how much revenue (sales) a company earns and how much profit or loss it generates after all expenses.
Key components:
- Revenue (Sales): The total income generated from selling goods or services. It’s the top line of the income statement.
- Gross Profit: Calculated as revenue minus the cost of goods sold (COGS). It represents the profit made before deducting operational expenses.
- Operating Income (EBIT): Earnings before interest and taxes, often referred to as operating profit, this metric shows how much profit is generated from the company’s core business operations after operating expenses are deducted.
- Net Income (Profit): The final profit figure after all expenses (interest, taxes) have been deducted from revenue. It’s the “bottom line.”
- Earnings Per Share (EPS): Net income divided by the number of shares outstanding. EPS shows how much profit is attributed to each share, helping investors compare profitability across companies.
B. Balance Sheet
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the shareholders’ equity.
Key components:
- Assets:
- Current Assets: Cash, accounts receivable (money owed to the company), and inventory that can be converted into cash within a year.
- Non-Current Assets (Fixed Assets): Long-term investments like property, equipment, and intellectual property.
- Liabilities:
- Current Liabilities: Obligations the company must pay within a year, such as accounts payable, short-term debt, and wages.
- Non-Current Liabilities: Long-term debt, pension obligations, or deferred tax liabilities.
- Shareholders’ Equity: The residual interest in the company’s assets after all liabilities have been paid. It represents the net worth of the company from the owners’ perspective (assets minus liabilities).
C. Cash Flow Statement
The cash flow statement provides insight into how cash flows into and out of the company. It is divided into three sections:
- Cash Flow from Financing Activities (CFF): This includes cash flows related to raising or repaying capital, such as issuing stock, repaying debt, or paying dividends to shareholders.
- Cash Flow from Operating Activities (CFO): This reflects the cash generated or used by the company’s core business operations. Positive operating cash flow indicates that the business is generating sufficient cash from its day-to-day operations.
- Cash Flow from Investing Activities (CFI): This section shows cash used for investments in assets like property, machinery, or the acquisition of other companies. It could also include proceeds from the sale of assets.