Financial Statements

October 10, 2022 8:07 am Information 0 Comment

Overview

Financial statements are written records of the financial activities and performance of the company. They are one of the best ways to learn about the health of the company. Profit & Loss (P&L) or Income statement, Balance Sheet, and Cash Flow statement are the three financial statements that an investor needs to learn to read and interpret. Keep in mind that the company has to follow the accounting principles set forth by the government while preparing these statements.

The Profit & Loss statement gives you an overall picture of the revenue, costs, and profit/loss the company generated in a particular time period. Public companies are required to publish a P&L statement every quarter and also a yearly P&L statement.

The balance sheet tells you what the company owns and what it owes to others. It is divided into three sections: Assets, Liabilities & Shareholder’s Equity. Assets are things that a company owns, i.e. property, equipment, land, cash in bank accounts, etc. Liabilities is another fancy term for debt. Debt is something that a company owes to someone and needs to pay back within a certain time period. Eg: any kind of loan that a company takes, cash/money payable to suppliers, property lease commitments, etc. The shareholder’s equity section shows how much money the investors/owners of the company have invested in the company via investing money in return of equity or by retaining earnings over time. Keep in mind that a Balance Sheet reflects the status as of a particular date. 

Cash Flow statements show you how much money came in and how much money went out of the company. Cash Flow statements have three sections: Cash from operations, cash from investing, and cash from financing. Cash from operations as the name suggests shows the cash that the company generated or used during its day-to-day operations. Cash from investing tells you how much money the company spent or gained as a result of its investments. Typically the biggest line item under this section is the Capital expenditure that the company undertakes. And cash from financing shows the cash that the company received as loans, by selling equity, etc, or the money given to other entities as loans, etc.

A lot of investors focus on the free cash flow of the company. Free cash flows are calculated by subtracting capital expenditure from cash from operations. A positive free cash flow means that the company is generating enough money to sustain its day-to-day operations.

One must learn to understand these three statements if he/she wants to be a successful long-term investor.

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Editor @ Thryvv
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Disclaimer: The information provided here is for information purposes only. It should not be taken as investment advice. Please consult your investment advisor before making investment decisions.

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