Here is how to understand and analyze the 3 major financial statements:

If you invest, you must understand the 3 major financial statements:

▪️ Balance Sheet

▪️ Income Statement

▪️ Cash Flow Statement

Accounting is the language of business, so it's important to understand & analyze each one. Financial statements are important because they provide important insights into a company's financial health, helping you make better-informed decisions on buying or selling stocks. Analyzing financial statements will help you make better decisions about investing in a stock.

(1) The income statement shows a company's revenues, expenses, and net income.

It helps investors understand a company's profitability and ability to generate income.

An income statement has 2 sections:

A. Income section covers revenues (sales, interest income, investment gains, etc)

B. Expense section covers costs (costs of goods sold, selling & administrative expenses, interest expenses, etc)

Net income (or loss) is calculated by subtracting expenses from revenues and is reported at the bottom of the income statement, along with any taxes and net income (or loss) per share of common stock.

3 items to analyze in an income statement:

A. Profit margins: Assess the portion of revenue turned into profits; higher margins suggest efficient expense management

B. Expense management: Ensure the company controls expenses; expenses rising faster than revenues are a red flag

C. Revenue growth: Observe if the company's revenue is increasing or decreasing over time, indicating its overall health and growth prospects.

Let's talk about the balance sheet.

(2) The balance sheet shows a company's net worth to investors, displaying assets, liabilities, and equity.

• Assets include cash, accounts receivable, and property, plant, and equipment

• Liabilities consist of accounts payable, taxes payable, and long-term debt

• Equity represents shareholder ownership interests.

The balance sheet shows a company's financial position and helps investors assess a company's liquidity and solvency.

3 items to analyze in a balance sheet:

A. Asset quality: Check for a strong, diverse asset base, which can support growth & withstand downturns

B. Working capital: Ensure there are enough resources to cover short-term obligations, indicating greater financial stability

C. Debt levels: Assess if the company carries excessive debt, which can increase financial risk and vulnerability during economic downturns.

Let's talk about the statement of cash flows:

(3) The statement of cash flows tracks cash inflows and outflows, helping investors evaluate a company's liquidity, solvency, ability to pay debts, and generate cash.

It's divided into 3 sections:

• Operating activities

• Investing activities

• Financing activities

The statement of cash flows shows how a company generates & uses cash, helping assess financial health and ability to fulfill financial obligations.

A. Operating activities show cash flows from core business operations (customer payments, supplier or employee expenses, etc)

B. Investing activities show cash flows from buying & selling long-term assets (investments in companies, property, plant & equipment, etc)

C. Financing activities show cash flows related to debt & equity (issuing shares, paying loans, dividends, etc)

3 items to analyze in a cash flow statement:

A. Capital expenditures: Assess if the company is investing in its business, suggesting good growth prospects.

B. Financing activities: Examine new debt or equity issuance, as it affects the company's financial risk profile.

C. Operating cash flow: Check if the company generates enough cash from operations to cover expenses and debts, indicating financial health.

Financial statements are essential for evaluating financial performance.