Dig Deeper Into Company Financial Statements

Let’s take this a step further and really dig into the finances of each company you choose. We all know that owning a piece of a company can be exciting especially when we are familiar with their products, which has been around for many decades. In Investor 101, we learn to remove our emotions and put our business hat on.

You would be surprised that not every big company operates efficiently as it should so they have to be scrutinized just as much as the new guys on the block. Good thing for us(the public), we have access to information that really tells the true story of each organization.

As a shareholder, you have to know what you are getting yourself into and the best way to do this is to learn how to read 3 important company documents such as income statements, balance sheets, and cash flow statements. By understanding these 3 documents, you will know whether the company stock you love is a good buy or not.


Income Statement: presents the revenues and expenses for a specific period of time. Both revenue and expenses result in net income or net loss for the company. Net loss occurs when expenses exceed revenue. Net income occurs when revenue exceeds expenses.

Equation: Revenue – Expenses = Operating Income

Balance Sheet: reports the assets, liabilities, and owner’s equity at a specific date. This tells you how much the company owns(assets) and what the company owes(liabilities).

Equation: Assets = Liabilities + Shareholder’s Equity

Statement of Cash Flows: summarizes information about the cash inflows(receipts) and cash outflows(payments) for a specific period of time. This is the main document that really ties in the income statement and the balance sheet together by telling you whether the company has any money leftover.

Key Things To Look For When Analyzing An Income Statement

(Income Statement example from Investing.com)

1. Revenue should always exceed Expenses on this statement. It’s a red flag if the expenses is bigger than the revenues shown meaning that the company is having problems.

2. Non Recurring Charges should not appear frequently in this statement. These are one-time charges that are not part of regular operations. Examples: Closing a plant or selling a division. In a healthy company, this line will be blank majority of the time.

3. Look at the Selling, General, and Administrative line to see if the overhead expenses is rising fast in this area. If this line item is drastically increasing even though revenue(sales) remains the same then this company is not very a cost-effective firm.


Key Things To Look For When Analyzing A Balance Sheet

1. Assets should always be higher than Liabilities. A company should own more than it owes so this would be the first thing to compare as you look from quarter to quarter and annually.

2. Accounts Receivable(customers owe money) should always be lower than the organization’s sales growth. It’s a red flag if this line item is higher than Revenue because that means they are having trouble collecting money that customers owe them!

3. Under the Stockholder’s Equity Section, see if retained earnings is positive or negative. Retained earnings is net income used to reinvest into the company core business, which is a huge plus. They can use this extra money to pay dividends to shareholders.

Key Things To Look For When Analyzing A Cash Flow Statement

1. Declining cash flow with high net income is a red flag. Watch for “Cash Flow From Operations” that begins to shrink over time as Net Income(earnings) grows.
Use this equation: CFFO – NI = Negative or Positive Result

2. Free Cash Flow should always be increasing, not deteriorating over time. When free cash flow plummets, expect big problems!  To really determine whether the company is generating money, use this equation:
Free Cash Flow = Cash Flow From Operations – Capital Expenditures – Cash Dividends

Is There More Investigation That I Can Do?

Now that we have covered the key items to look for in a company financial statement, you will be more prepared to make critical investment decisions for your future.

You have probably have heard the term that, “The numbers do not lie.”

As you utilize the equations above and perform more calculations for each company, you will be able to reveal more answers to your own questions in regards to how the company is performing.

To investigate each company a little further, I recommend reading their 10-Q and 10-K reports. They are comprehensive quarterly and yearly reports that are required by the Securities and Exchange Commission(SEC), that provides great detail into how the company runs its business. This will give you more insight into the policies they create & follow, disclosures, management compensation structure, any issues the company has run into, and much more.  To find company filings, go to www.sec.gov and research the company name.

If you have any investing questions and would like answers, please feel free to set up an appointment with me here.

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2 Responses to Dig Deeper Into Company Financial Statements

  1. Lester says:

    Hey Krystle,

    Great post on explaining key features of the 3 financial statements! I really liked your tip on looking for increasing free cash flows as it does make sense for a stable company to improving this metric over time.

    If you had to pick one statement to learn from first, which one would you recommend?

    • Krystle Hall says:

      I recommend learning about Cash Flows in great detail because this statement will tell you the whole story about a company. It will reveal how much actual cash the company has generated, which is critical information for all investors.

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