The three key financial statements
The income statement shows revenue, expenses and profit over a period. The balance sheet shows assets, liabilities and shareholder equity at a point in time. The cash flow statement shows how money actually moved through the business.
Reading all three together gives a more complete picture. A company can report accounting profit while still having weak cash generation, or it can show strong revenue growth while taking on too much debt.
What analysts look for
Analysts often focus on revenue growth, profit margins, return on capital, debt levels, free cash flow, and whether the company has an economic advantage such as brand strength, scale, or switching costs.
The quality of growth matters. Sales growth that comes with collapsing margins or rising debt may be much less attractive than slower but durable growth.
Looking at the trend helps show whether the business is becoming stronger or weaker.
Valuation matters
A business can be excellent and still be overpriced. Valuation compares the price investors pay with the earnings, cash flow, assets or growth of the company. Common measures include the price-to-earnings ratio, price-to-sales ratio, enterprise value to EBITDA and free-cash-flow yield.
No single ratio is enough on its own. The right comparison depends on the industry, growth profile and business model.
Questions to ask before investing
What does the business actually do? How does it make money? What could weaken its profitability? Does it have too much debt? Are margins stable? Is management using capital well?
Good fundamental analysis is structured curiosity. It tries to understand both opportunity and vulnerability.
Worked idea: growth versus quality
Two companies both grow revenue by 15%. Company A funds that growth with rising debt and weak cash generation. Company B grows more efficiently, maintains margins and generates strong free cash flow. The growth rate is similar, but the quality of the growth is very different.
Main takeaways
- Financial statements work best when read together.
- Quality matters as much as growth.
- Valuation changes the attractiveness of an investment.
- Good analysis asks how the business makes money and what could go wrong.
Questions to test understanding
- What does the cash flow statement reveal?
- Why can a great company still be a poor investment?
- Name one measure used to think about valuation.