Did you know that 95% of business people struggle to read the financial statements of a company?
Warren Buffett calls accounting the language of business—an essential skill for investors and business professionals.
That’s like being a chef who can’t follow a recipe!
This guide is for you if you’re aiming for a career in investment banking or any role that requires financial expertise.
In under 9 minutes, you’ll learn:
- What are financial statements
- How to read the financial statements of a company
- The standard financial statements format
Ready to think like a CFO? Let’s dive in!
What are the Financial Statements of a Company?
The financial statements of a company summarize its financial activities and performance over a specific period—typically a quarter or a year.
They help:
- Managers make informed business decisions
- Investors assess profitability and growth potential
- Lenders evaluate whether the company can repay loans
In short, they provide a clear picture of a company’s financial health.
There are 3 key financial statements:
a. Balance Sheet: What does the company own and owe?
b. Income Statement: How much money did the company make or lose?
c. Cash Flow Statement: Where is the money going and coming from?
Each of these statements answers a specific question to give a full view of a company’s financial position.
Let’s understand this with a simple example.
Meet Tea-gracious, a family-run business known for its special blend of masala tea.
Their financial year has just ended, and they’ve prepared their financial statements.
Let’s go through them one by one.
1. Balance Sheet: The snapshot of financial health.
It shows:
- What a business owns (assets)
- Owes (liabilities)
- The owner’s share (equity) at a specific point in time.
For Tea-gracious, their Balance Sheet might show:
- Assets: Tea leaves, packaging material, cash in the bank
- Liabilities: Loans taken to buy tea processing machines
- Equity: The owner’s initial investment + retained earnings
It’s also known as the Statement of Financial Position because it reflects where a business stands financially at a given moment.
2. Income Statement: The profit & loss report.
If the Balance Sheet is a snapshot, the Income Statement is like a video recording of how much money was made and spent over time.
For Tea-gracious, their Income Statement shows:
Revenue (Money Earned):
- Sales of masala tea: ₹10,00,000
Expenses (Money Spent):
- Cost of tea leaves and ingredients: ₹3,00,000
- Packaging and delivery costs: ₹1,00,000
- Salaries for employees: ₹2,00,000
Net Profit (Revenue – Expenses):
- ₹4,00,000 (This is the final profit Tea-gracious made this year!)
This statement helps investors and managers understand if the business is profitable and how much money is being spent on running it.
3. Cash Flow Statement: Tracking the money flow.
Now, just because Tea-gracious made a ₹4,00,000 profit doesn’t mean they have that much cash in hand.
The Cash Flow Statement helps you see where the money actually went.
It tracks cash movement under 3 categories:
4. Operating Activities
(Daily Business Transactions):
- Money received from tea sales: ₹9,50,000
- Money spent on tea leaves, packaging, and salaries: ₹6,00,000
- Net cash from operations: ₹3,50,000
5. Investing Activities
(Buying/Selling Long-Term Assets):
- Tea-gracious bought a new tea-processing machine: ₹1,00,000
- Net cash from investing: -₹1,00,000
6. Financing Activities
(Loans & Investments):
- Took a loan of ₹50,000 for machine upgrades
- Net cash from financing: ₹50,000
Final Cash Balance = ₹3,50,000 – ₹1,00,000 + ₹50,000 = ₹3,00,000
This means Tea-gracious now has ₹3,00,000 in cash to reinvest in the business or keep for future expenses!
To wrap it up:
Balance Sheet → What Tea-gracious owns and owes
Income Statement → How much profit or loss Tea-gracious made
Cash Flow Statement → Where cash is coming from and going
Understanding these statements is like brewing the perfect cup of tea—you need the right balance of ingredients to get the best results.
Now that you know how to read them, you’re one step closer to thinking like a CFO!
How to Read the Financial Statements of a Company?
If you’re analyzing a company for a potential investment, you can’t just rely on its products or future potential—you need to understand its financial health.
Unfortunately, many investors skip this step and make decisions based only on a company’s brand or market buzz.
But if you want to avoid rushed or poor investment choices, you must learn to read financial statements thoroughly—a crucial skill for investment bankers, analysts, and smart investors.
At first glance, financial statements can seem overwhelming—full of numbers, complex terms, and strange wording.
But once you understand the basics, they’re not as difficult as they seem.
In fact, they can be quite interesting because they tell you:
- How well a company is actually performing
- How it’s being run
- What risks or opportunities exist
There are many ways to analyze financial statements, but first, you need to learn how to read them – so you know exactly what you’re looking at.
Let’s break it down in a simple way.
1. Start with the big picture, then dive into the details:
Don’t get lost in the numbers right away.
First, understand what the company does, its industry, and recent news. This helps you see the context behind the financials.
Quick tip: Read the Management Discussion & Analysis (MD&A) section in annual reports.
It explains company performance in simple terms.
2. Read the balance sheet like a health check:
Think of the balance sheet like a medical report.
It shows whether the company is financially strong or struggling.
What to check:
- Current Ratio = Current Assets / Current Liabilities → A ratio above 1 means the company can pay its short-term debts.
- Debt-to-Equity Ratio = Total Debt / Total Equity → A high ratio means the company is borrowing too much.
Quick tip: Compare these ratios with industry benchmarks.
What’s normal for a tech company might be risky for a manufacturing firm.
3. Read the Income Statement like a scoreboard:
Look at trends, not just numbers.
A high revenue is good, but is it growing consistently?
What to check:
- Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue → Shows if the company is controlling costs well.
- Net Profit Margin = Net Profit / Revenue → Higher margins mean a more profitable company.
Quick tip: If revenue is growing but net profit isn’t, check for rising expenses—it could be a warning sign.
4. Read the Cash Flow statement like a bank account:
Profits don’t mean cash!
Many profitable companies still go bankrupt because they run out of cash.
What to check:
- Operating Cash Flow – Is the company making money from its core business?
- Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditures → If it’s positive, the company has cash for growth.
Quick tip: If a company is making high profits but has a negative operating cash flow, it may be struggling to collect payments or spending too much.
5. Compare year over year (YoY) & industry benchmarks:
One year’s numbers mean nothing without comparison.
Always check trends over multiple years.
Quick tip: Look at the past 3-5 years to spot growth patterns or warning signs.
6. Find red flags:
Watch out for:
- Declining revenue but increasing debt
- High net profit but weak cash flow
- Unusual jumps in expenses or losses
Quick tip: Check the footnotes in financial statements.
Companies hide important details there!
7. Use free tools to analyze faster:
Don’t manually calculate everything—use these free tools:
- Yahoo Finance (Quick ratios & comparisons)
- MacroTrends (Historical data)
- TIKR (Detailed financial reports)
Reading financial statements is like solving a puzzle.
Once you break it down into simple steps, it becomes clear and insightful.
Start small—pick one company, go through these steps, and soon, you’ll analyze financial statements like a pro!
Financial Statements Format
A well-structured financial statement format is crucial for accurately assessing a company’s financial health.
It ensures consistency, making it easier to compare financial data across different periods and businesses.
Whether you’re an analyst, investor, or finance professional, understanding the correct format helps you interpret key metrics and make informed decisions.
Conclusion
If you’re serious about a finance career, whether as an analyst, banker, or investor, the first thing you need to master is reading the financial statements of a company.
Understanding how these statements are structured and how they connect gives you a clear picture of a company’s financial health.
A great way to practice?
Download financial statements from different companies, compare them, and see how financial statements with adjustments, such as:
- Depreciation
- Revenue recognition
- Non-cash expenses affect the financials.
Over time, you’ll spot trends, strengths, and red flags more easily.
And if you’re preparing for interviews, showcasing a strong grasp of financial statements can give you a serious edge.
So, before diving into anything else, make sure you can read and analyze financial statements like a pro.
