What do financial statements tell you about a company

Popular Courses. Part Of. Introduction to Company Valuation. Financial Ratios. Fundamental Analysis Basics. Fundamental Analysis Tools and Methods. Valuing Non-Public Companies. Table of Contents Expand. What Are Financial Statements?

Using Financial Statements. Understanding Balance Sheets. The Balance Sheet Formula. Data From the Balance Sheet. Balance Sheet Items. Example of a Balance Sheet. Income Statements. Income Statement Formula. Data From Income Statements. Example of an Income Statement. The Cash Flow Statement. Data From Cash Flow Statements. Example of a Cash Flow Statement. Financial Statement Limitations. Key Takeaways Financial statements are written records that convey the business activities and the financial performance of a company.

The balance sheet provides an overview of assets, liabilities, and stockholders' equity as a snapshot in time. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This article will teach you more about how to read a balance sheet. The document is often shared as part of quarterly and annual reports, and shows financial trends, business activities revenue and expenses , and comparisons over set periods. This article will teach you more about how to read an income statement.

Cash flow statements are broken into three sections: Cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. Investing activity is cash flow from purchasing or selling assets—usually in the form of physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt.

Financing activities detail cash flow from both debt and equity financing. Both are important numbers to know. With a cash flow statement, you can see the types of activities that generate cash and use that information to make financial decisions. This article will teach you more about how to read a cash flow statement.

This circumstance can be confusing for the beginning investor. There's little hope that things will change on this issue in the foreseeable future, but a good financial dictionary can help considerably.

Investopedia's Glossary of Terms provides you with thousands of definitions and detailed explanations to help you understand terms related to finance, investing, and economics. The presentation of a company's financial position, as portrayed in its financial statements, is influenced by management's estimates and judgments.

In the best of circumstances, management is scrupulously honest and candid, while the outside auditors are demanding, strict, and uncompromising. Whatever the case, the imprecision that can be inherently found in the accounting process means that the prudent investor should take an inquiring and skeptical approach toward financial statement analysis.

Information on the state of the economy, the industry, competitive considerations, market forces, technological change, the quality of management and the workforce are not directly reflected in a company's financial statements. Investors need to recognize that financial statement insights are but one piece, albeit an important one, of the larger investment puzzle.

The absolute numbers in financial statements are of little value for investment analysis unless these numbers are transformed into meaningful relationships to judge a company's financial performance and gauge its financial health.

The resulting ratios and indicators must be viewed over extended periods to spot trends. Please beware that evaluative financial metrics can differ significantly by industry, company size, and stage of development. The financial statement numbers don't provide all of the disclosure required by regulatory authorities. Analysts and investors alike universally agree that a thorough understanding of the notes to financial statements is essential to properly evaluate a company's financial condition and performance.

As noted by auditors on financial statements "the accompanying notes are an integral part of these financial statements. Prudent investors should only consider investing in companies with audited financial statements, which are a requirement for all publicly-traded companies. Perhaps even before digging into a company's financials, an investor should look at the company's annual report and the K. Much of the annual report is based on the K, but contains less information and is presented in a marketable document intended for an audience of shareholders.

The K is reported directly to the U. Included in the annual report is the auditor's report , which gives an auditor's opinion on how the accounting principles have been applied. A "clean opinion" provides you with a green light to proceed. Qualifying remarks may be benign or serious; in the case of the latter, you may not want to proceed. Typically, the word "consolidated" appears in the title of a financial statement, as in a consolidated balance sheet.

The presumption is that consolidation as one entity is more meaningful than separate statements for different entities. Robert Fullet. FT Press, Financial Accounting Standards Board. Securities and Exchange Commission. Financial Statements. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets.

While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.

A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time.

The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts.

Each part reviews the cash flow from one of three types of activities: 1 operating activities; 2 investing activities; and 3 financing activities. For most companies, this section of the cash flow statement reconciles the net income as shown on the income statement to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items such as adding back depreciation expenses and adjusts for any cash that was used or provided by other operating assets and liabilities.

The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant and equipment, as well as investment securities. If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash.

The third part of a cash flow statement shows the cash flow from all financing activities. Typical sources of cash flow include cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow. He finished seventh, but if he had won, it would have been a victory for financial literacy proponents everywhere. The footnotes to financial statements are packed with information.

Here are some of the highlights:. It is intended to help investors to see the company through the eyes of management. Listed below are just some of the many ratios that investors calculate from information on financial statements and then use to evaluate a company.

As a general rule, desirable ratios vary by industry. If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two dollars of debt to every one dollar shareholders invest in the company. In other words, the company is taking on debt at twice the rate that its owners are investing in the company.

Operating margin is usually expressed as a percentage. It shows, for each dollar of sales, what percentage was profit. Although this brochure discusses each financial statement separately, keep in mind that they are all related. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And so on.

No one financial statement tells the complete story. But combined, they provide very powerful information for investors.