Financial Statements (Balance Sheet, Income Statement, Cash Flow Statement)
The three tables that show a company's household — what it owns (balance sheet), what it earned (income statement), and the cash that actually moved (cash flow statement).
In plain terms
Financial statements are a company's household ledger. They split into three pages: ① the balance sheet is "the wealth and debt held right now" (a snapshot at one point), ② the income statement is "how much was earned and spent this quarter" (a report card for the period), ③ the cash flow statement is "how much cash actually moved."
The key is that profit (income statement) and cash (cash flow statement) differ. Sell on credit and profit is booked but no cash lands in the bank. So you have to read all three together to see the real household.
What it tells you
You can grasp, in combination, what the company earns money from (income statement), what it owns and how much it owes (balance sheet), and whether that profit comes in as actual cash (cash flow statement).
Almost every metric — PER, ROE, debt-to-equity — is computed from the numbers in these three tables. Knowing the financial statements makes clear where the metrics come from.
Formula
balance sheet: assets = liabilities + equity (state of wealth at a point in time) income statement: revenue − expenses = profit (performance over a period) cash flow statement: the flow of cash actually in and out
What high or low means
When the three tables fit together (profit rising while cash comes in too, and debt not excessive), it is read as sound.
If profit rises but the cash on the cash flow statement falls, or debt is growing fast, it is a signal to look harder behind the numbers.
The "profit" on the income statement is a number computed under accounting rules, so it differs from the actual bank balance. Relaxing on profit alone can miss a company whose cash is drying up.
Looking at one quarter alone leaves you swayed by temporary events. You have to read across several quarters and years to see the trend.
US companies' financial statements are held in SEC filings (10-K, 10-Q). Our service shows these filing numbers as the source.
In 2002, the US telecom company WorldCom appeared on its income statement to be earning healthy profits. The trick was accounting fraud — it disguised the yearly cost of running its network (an expense) as an "asset," putting it on the balance sheet to inflate the income statement's profit.
Merely moving costs to assets fabricated about $11 billion of profit, and when caught WorldCom filed for what was then the largest bankruptcy in US history. Looking only at the single profit line of the income statement, you would have been fooled; but watching that cost pile up as an asset on the balance sheet while no cash came in on the cash flow statement, you would have caught the oddness. It is why the three tables have to be read side by side.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Financial and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.