Basic Financial Statement Analysis

Understanding a company's value starts with reading its financial story — and that story is told through financial statements. Think of it like reading a health report before investing in a gym membership. You want to know the company's financial fitness before you commit.

Key Financial Statements

1. Balance Sheet:

The Balance Sheet provides a snapshot of what a company owns and owes at a particular point in time. It lists assets, liabilities, and shareholders' equity. A strong balance sheet indicates that the company is well-positioned to meet its obligations and fund future growth.

2. Income Statement:

The Income Statement, also known as the Profit and Loss Statement, records the company's revenues and expenses over a specific period. It reveals whether the company is making a profit or incurring a loss. Analysing the income statement helps investors understand the company's operational efficiency and profitability trends over time.

3. Cash Flow Statement:

The Cash Flow Statement tracks the actual inflow and outflow of cash within the company. It is divided into cash flows from operating activities, investing activities, and financing activities. A company might show a profit on the income statement but still struggle if cash flows are weak. Therefore, strong operating cash flows are critical indicators of financial health.

Example: When Maruti Suzuki reports profits, smart investors don't just look at the income. They also check if cash flow from operations is strong, ensuring profits aren't just "on paper."

Psst! Always check the footnotes in financial statements. Hidden debts, legal risks, and revenue recognitions are often revealed there. Reading financial statements is the first real step toward understanding a company's true worth. In the next chapter, we'll compare Intrinsic vs. Relative Valuation methods to see how valuation frameworks differ.