Financial Statements

Every publicly listed company publishes three financial statements every quarter. Together they give you a complete picture of what a business earns, what it owns, and how cash flows through it. Most investors only look at the income statement's headline numbers. The ones who actually understand all three gain a significant informational edge over those who don't.

The Income Statement — what the company earned

The Balance Sheet — what the company owns and owes

The balance sheet must always balance: Assets = Liabilities + Equity. It's a snapshot of the company's financial position at a single moment. Key things to look for:

• Cash and short-term investments — liquidity buffer; rising cash over time is a sign of quality
• Goodwill — intangible asset from acquisitions; large goodwill relative to equity can signal overpayment for past deals
• Total debt — both short-term (due within a year) and long-term; compare to EBITDA
• Retained earnings — cumulative profits kept in the business rather than paid as dividends; rising retained earnings = profitable history

The Cash Flow Statement — what actually arrived

The cash flow statement corrects accounting's biggest flaw: accrual accounting lets companies recognise revenue before cash arrives and defer expenses. The cash flow statement shows what actually moved. Three sections:

• Operating cash flow — cash generated from the core business; should exceed net income for a healthy company
• Investing cash flow — typically negative (capex, acquisitions); shows how aggressively the company is reinvesting
• Financing cash flow — debt raised/repaid, dividends paid, shares issued/repurchased

Free cash flow = Operating cash flow − Capex. This is the real money a company generates that can be used for dividends, buybacks, debt repayment, or acquisitions. Companies that show net income but consistently negative free cash flow are burning cash despite appearing profitable on paper.