Financial statements are a company's report card. If you want to know whether a business is actually making money, drowning in debt, or burning through cash, this is where you find out. Let's demystify the three main statements every investor should understand.
The Three Financial Statements
Public companies release three main financial statements every quarter. Each tells a different part of the story. Together, they give you a complete picture of a company's financial health.
Income Statement
Shows if the company made or lost money (profit and loss)
Balance Sheet
Shows what the company owns and owes (assets and liabilities)
Cash Flow Statement
Shows actual cash moving in and out of the business
The Income Statement
Also called the Profit & Loss statement (P&L), this shows whether the company made money over a period of time—usually a quarter or a year.
Revenue (Top Line)
Total money coming in from selling products or services. This is the starting point for everything else.
Cost of Goods Sold (COGS)
Direct costs to make what they sell—materials, factory labor, etc.
Gross Profit
Revenue minus COGS. Shows how much is left after making the product but before other expenses.
Operating Expenses
Costs to run the business—salaries, rent, marketing, research. Not directly tied to production.
Operating Income
Gross profit minus operating expenses. Shows profit from core business operations.
Net Income (Bottom Line)
Final profit after ALL expenses, including interest and taxes. This is "did the company make money?"
Net income divided by the number of shares outstanding. This is what most earnings reports focus on. If a company earned $1 billion with 500 million shares, EPS is $2.00.
The Balance Sheet
The balance sheet is a snapshot of what the company owns and owes at a specific moment. It follows one fundamental equation:
The Accounting Equation
Core ConceptAssets = Liabilities + Shareholders' Equity
The Cash Flow Statement
This is where many investors miss crucial information. A company can show profits on the income statement while actually burning through cash.
Companies use "accrual accounting," recording revenue when earned (not when cash arrives) and expenses when incurred (not when paid). A company can be "profitable" while running out of cash.
Cash from running the business—collecting from customers, paying suppliers and employees. This should be positive for a healthy company.
Cash spent on (or received from) investments—buying equipment, acquiring companies, selling assets. Usually negative as companies invest in growth.
Cash from investors and lenders—issuing stock, borrowing money, paying dividends, buying back shares.
Free Cash Flow
Key MetricOperating cash flow minus capital expenditures. This is the cash a company can use for dividends, acquisitions, debt paydown, or saving for a rainy day. Many investors consider this the most important number.
Red Flags to Watch
When analyzing financial statements, these warning signs should make you dig deeper:
Where to Find Financial Statements
Public companies file financial statements with the SEC:
Full-year financials with detailed business discussion and risk factors. The most comprehensive filing.
Three-month financials with updates on operations. Less detailed than the 10-K but more frequent.
Updates on major events between regular filings—acquisitions, leadership changes, earnings surprises.
Find filings at SEC.gov/EDGAR or on the investor relations section of any public company's website. Most financial websites like Yahoo Finance also provide key data from these filings.
The Bottom Line
Financial statements might look intimidating, but they follow the same structure for every company. The income statement tells you if they're profitable, the balance sheet shows their financial position, and the cash flow statement reveals the real money moving through the business.
You don't need to analyze every line item. Focus on the key metrics: revenue growth, profit margins, debt levels, and free cash flow. Compare these to previous periods and competitors.
That alone puts you ahead of most investors who just look at the stock price.