How to Read Stock Financial Statements

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Every listed company publishes three financial statements. The balance sheet shows what it owns and owes on one day. The income statement shows whether it made a profit over a period. The cash flow statement shows whether real cash actually came in. You read all three together, because a company can report a profit and still run short of cash.

If you really want to know how a company is doing, you need to read their financial statements. It’s the fastest and most reliable way to know if a company is doing well or struggling to survive.

There are three different kinds of financial statements: the balance sheet, the income statement and the cash flow statement. First, let’s start with the balance sheet. This summarizes a company’s assets, liabilities and equity at a specific time.

Assets are broken down into two categories: current assets which include cash and highly liquid investment securities, and non-current assets, which include property, buildings, plant, equipment and software. Next are the company’s liabilities, also split into two. Current liabilities include bank loans, accounts payable and other payables such as payroll and accrued expenses. Non-current liabilities include long-term loans and other long-term financial obligations. If you subtract the total liabilities from the total assets, you get the total shareholders equity.

Now, let’s move to the company’s income statement. This measures how much profit or loss the company has made over a specific period of time, which is why it’s also referred to as a P&L statement. First, you have revenue which is the amount of money the company makes by selling products or providing services.

Next comes COGS, or cost of goods sold, which is the amount spent producing or acquiring the products or services, including material and labor costs. Subtract COGS from revenue and you’ve got gross profit. Then come the operating expenses, which include day-to-day things like marketing costs and indirect labor costs. Subtract those from gross profit and you’ve got operating income. Next, subtract all other miscellaneous expenses and you’ve got the company’s profit before tax. Subtract the tax and you’ve got net profit.

And that leads us to the third financial statement, the cash flow statement. This measures how much cash flows in and out of a company over a specific period because a company’s revenue and expenses can be delayed or deferred. This shows the actual cash flowing in and out of the company. First, you add together the cash flows from all operating activities including profit before taxes, trade and other receivables, and trade and other payables then you add the cash flows from investment activities along with the cash from financing activities. You then, compare the cash at the beginning of the financial year to the cash at the end, to determine if the company had a positive or negative cash flow and that’s how you read a company’s financial statements.

Where do I find a company’s financial statements?

For a company listed in Singapore, the annual report and the half-yearly or quarterly results sit on SGX’s company announcements page, and usually on the company’s own investor relations page too. For a US-listed company, the annual report is the 10-K and the quarterly one is the 10-Q, and both are free on the SEC’s EDGAR search. Start with the latest annual report. It carries all three statements in one place, along with the notes that explain them.

The next step is turning these numbers into a handful of ratios you can compare across companies: Shortcuts to Analyzing Financial Ratios for Stocks.

The stock valuation series: 1. How to Find Undervalued Stocks for Investment · 2. How to Read Stock Financial Statements · 3. Shortcuts to Analyzing Financial Ratios for Stocks · Going deeper: Book Summary: The Intelligent Investor by Benjamin Graham

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Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.

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