How Should I Analyze a Company's Financial Statements?

How Should I Analyze a Company’s Financial Statements?

10 februarie 2020
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Operating expenses represent the costs incurred by a company to run its core operations. The most common operating expenses are SG&A expenses (Selling, General & Administrative expenses), that consist of non-manufacturing costs like marketing, accounting, human resources, and more. Another typical operating expense is R&D (Research & Development), which consists of costs to design new products, technologies, or services.

In Apple’s case, they report the cost of sales for their respective segments, and then call that gross margin. In InvestingPro, you can see the gross profit dollars and then the gross profit margin % (Apple’s rose from 38.2% to 41.8% in their fiscal year 2021). There are situations where intuition must be exercised to determine the proper driver or assumption to use. Instead, an analyst may have to rely on examining the past trend of COGS to determine assumptions for forecasting COGS into the future. After preparing the skeleton of an income statement as such, it can then be integrated into a proper financial model to forecast future performance. After deducting all the above expenses, we finally arrive at the first subtotal on the income statement, Operating Income (also known as EBIT or Earnings Before Interest and Taxes).

Summary Comparison of the Three Financial Statements

Investors should start by learning how to interpret key figures on a company’s balance sheet, income statement, and statement of cash flows. Those wanting to dig a little deeper may want to consider learning how to analyze reports, such as shareholder’s equity and retained making sense of deferred tax assets and liabilities earnings. Investors can find a publicly traded company’s financial statements in its annual report or a 10-K filed with the SEC. Companies produce three major financial statements that reflect their business activities and profitability for each accounting period.

  • When the stock market boomed in the 1920s, investors essentially had to fly blind in deciding which companies were sound investments because, at the time, most businesses had no legal obligation to reveal their finances.
  • Like the balance sheet, companies prepare the income statement for their fiscal quarter ends and year ends.
  • The operating portion shows cash received from making sales as part of the company’s operations during that period.

It helps assess financial health using ratios, such as current ratio, debt-to-equity ratio and return on shareholder’s equity. The balance sheet summarizes the financial position of a company at a specific point in time. Here is a quick reference for the key differences between the balance sheet and income statement, summarizing what we’ve discussed above. Shareholder’s equity also includes retained earnings ― the portion of the net income that hasn’t been distributed to shareholders as dividends ― to be used for funding further growth and expansion of the business. This segment of the balance sheet includes return of equity (ROE), calculated by dividing net income by shareholder’s equity. ROE measures management’s effectiveness in employing and driving returns based on equity.

Income From Continuing Operations

The resulting ratios and indicators must be viewed over extended periods to spot trends. Please beware that evaluative financial metrics can differ significantly by industry, company size, and stage of development. However, real-world companies often operate on a global scale, have diversified business segments offering a mix of products and services, and frequently get involved in mergers, acquisitions, and strategic partnerships. Starting with direct, the top line reports the level of revenue a company earned over a specific time frame. Direct expenses are generally grouped into cost of goods sold or cost of sales, which represents direct wholesale costs.

Diversity of Reporting

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Cash flow from investing and financing

You may see the first line, often referred to as the top line, called sales, sales revenue, revenue, service revenues, and other similar titles. All of these titles are meant to reflect the sales generated by selling product to customers in the day-to-day business. On Clear Lake’s income statement in Figure 5.2, we see its top line referred to as Sales. An income statement is a rich source of information about the key factors responsible for a company’s profitability.

Know your business’s finances to succeed

The report is the result of a multiyear investigation into Mr. Trump’s receipt of payments from foreign-controlled entities while in office. The investigation began in 2016 under the leadership of Representative Elijah E. Cummings, Democrat of Maryland, who died in 2019. But once Republicans won control of Congress, they dropped the effort to force Mazars to continue with its production of documents about Mr. Trump’s business dealings. He added that “there is no president in United States history who was tougher on China than Donald Trump,” citing the substantial tariffs the former president imposed on the country’s goods and services. He also said the Trump Organization did “not have the ability or viability to stop someone from booking through third parties” at the hotel. On Thursday, Eric Trump said in an email that the Chinese bank mentioned in the report had signed a 20-year lease at Trump Tower in 2008, almost a decade before his father took office.


The meaningful interpretation and analysis of balance sheets, income statements, and cash flow statements to discern a company’s investment qualities is the basis for smart investment choices. Interpreting financial statements can be challenging, but there are several financial ratios that you can use to evaluate a company’s financial performance. Financial ratios are calculations based on a company’s financial statements that compare two or more financial elements to provide insights into a company’s financial health. The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company’s financial strength and provide a quick picture of a company’s financial health and underlying value. A company’s income statement will give the most basic assessment of how its business is doing.

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