You've been looking at financial statements all wrong.
I'll teach you how to analyse the Income Statement, Cash Flow Statement, and Balance Sheet in this thread—something no one else teaches.
Collaborated with @Analyst_Mayank
I'll teach you how to analyse the Income Statement, Cash Flow Statement, and Balance Sheet in this thread—something no one else teaches.
Collaborated with @Analyst_Mayank
(1) Income statement:
Reveals a company’s revenues, expenses, profit and loss over a period (Financial Year or a Quarter)
Investors should analyse it systematically to assess trends and red flags if any.
Reveals a company’s revenues, expenses, profit and loss over a period (Financial Year or a Quarter)
Investors should analyse it systematically to assess trends and red flags if any.
(1.1) Analyze Revenue (Top Line)
Check Sales Growth: Compare revenue over multiple periods
Identify Revenue Sources: Look at core operations vs. non-operating income. Revenue from core operations is important. Non-core income could be a small part derived from income from investments, Forex gain etc.
Seasonality & Trends: Some businesses have cyclical revenue (e.g., retail spikes during festivals)
🔹 Key Metric: Revenue Growth (%) (A rising trend suggests business expansion)
Check Sales Growth: Compare revenue over multiple periods
Identify Revenue Sources: Look at core operations vs. non-operating income. Revenue from core operations is important. Non-core income could be a small part derived from income from investments, Forex gain etc.
Seasonality & Trends: Some businesses have cyclical revenue (e.g., retail spikes during festivals)
🔹 Key Metric: Revenue Growth (%) (A rising trend suggests business expansion)
(1.2) Examine Cost of Goods Sold (COGS)
Direct costs linked to producing goods/services (Raw material, Labour, electricity etc.)
High COGS means Lower gross margins, which may indicate production costs may be too high OR there are Inefficiencies in the supply chain or manufacturing process
🔹 Key Metric: Gross Margin = (Revenue - COGS) / Revenue (Higher margin = Better efficiency in production)
Declining Gross Margin may be due to new inefficiencies coming in or company’s inability to pass on the rising cost of raw material and production (labour expenses, electricity expenses etc.) to the customers.
Direct costs linked to producing goods/services (Raw material, Labour, electricity etc.)
High COGS means Lower gross margins, which may indicate production costs may be too high OR there are Inefficiencies in the supply chain or manufacturing process
🔹 Key Metric: Gross Margin = (Revenue - COGS) / Revenue (Higher margin = Better efficiency in production)
Declining Gross Margin may be due to new inefficiencies coming in or company’s inability to pass on the rising cost of raw material and production (labour expenses, electricity expenses etc.) to the customers.
(1.3) Evaluate Operating Expenses and Operating Profit (EBIT)
Selling, General & Administrative (SG&A): Expenses related to advertising, salaries, rent, Depreciation and Amortization
If operating costs rise faster than revenue, profitability decline
Earnings Before Interest & Taxes (EBIT): Profitability measure that shows how profitable the core business is, excluding financing and tax costs
Compare EBIT across companies in the same industry
🔹Key Metric: EBIT Margin = EBIT / Revenue (Higher EBIT margin = Stronger operational efficiency)
Selling, General & Administrative (SG&A): Expenses related to advertising, salaries, rent, Depreciation and Amortization
If operating costs rise faster than revenue, profitability decline
Earnings Before Interest & Taxes (EBIT): Profitability measure that shows how profitable the core business is, excluding financing and tax costs
Compare EBIT across companies in the same industry
🔹Key Metric: EBIT Margin = EBIT / Revenue (Higher EBIT margin = Stronger operational efficiency)
(1.4) Analyze Net Profit (Bottom Line)
Net Profit (Net Income): Final earnings available for shareholders after all expenses, including taxes and interest
A consistent increase in net profit indicates a financially stable and growing business
🔹 Key Metric: Net Profit Margin = Net Profit / Revenue (Higher net margin = More profitability and more income available for shareholders)
A company having high EBIT but less net profit can be due to high interest cost. Once the debt is reduced or repaid, the company will be able to generate much higher Net profit for the shareholders
Net Profit (Net Income): Final earnings available for shareholders after all expenses, including taxes and interest
A consistent increase in net profit indicates a financially stable and growing business
🔹 Key Metric: Net Profit Margin = Net Profit / Revenue (Higher net margin = More profitability and more income available for shareholders)
A company having high EBIT but less net profit can be due to high interest cost. Once the debt is reduced or repaid, the company will be able to generate much higher Net profit for the shareholders
Limitation of an Income Statement:
It records sales and the associated profitability at the moment the invoice is generated. However, it does not indicate whether the transaction represents a legitimate sale or merely an artificial billing intended to inflate revenue
Cash flow and Balance sheet can help us in digging deeper and check the quality of sales
It records sales and the associated profitability at the moment the invoice is generated. However, it does not indicate whether the transaction represents a legitimate sale or merely an artificial billing intended to inflate revenue
Cash flow and Balance sheet can help us in digging deeper and check the quality of sales
(2) Cash Flow Statement (CFS)
Crucial for understanding how a company generates and uses cash
Unlike the income statement, CFS focuses on actual cash movement during the period, helping investors assess liquidity, solvency, and overall financial health
Crucial for understanding how a company generates and uses cash
Unlike the income statement, CFS focuses on actual cash movement during the period, helping investors assess liquidity, solvency, and overall financial health
(2.1) Cash Flow from Operating Activities (CFO)
Shows cash generated from core business operations
Positive CFO means the company is generating cash from operations
Negative CFO may indicate operational inefficiencies
🔹 Key Metric 1: Operating Cash Flow Margin = CFO / Revenue (Higher margin = Strong cash generation from operations)
🔹 Key Metric 2: Operating Cash Flow to Net Income Ratio (Higher ratio = Strong cash earnings quality.)
🚨 Red Flag: If net income is rising but CFO is declining, earnings might not be backed by real cash flow
Shows cash generated from core business operations
Positive CFO means the company is generating cash from operations
Negative CFO may indicate operational inefficiencies
🔹 Key Metric 1: Operating Cash Flow Margin = CFO / Revenue (Higher margin = Strong cash generation from operations)
🔹 Key Metric 2: Operating Cash Flow to Net Income Ratio (Higher ratio = Strong cash earnings quality.)
🚨 Red Flag: If net income is rising but CFO is declining, earnings might not be backed by real cash flow
(2.2) Cash Flow from Investing Activities (CFI)
Includes capital expenditures (CapEx), acquisitions, and investments
Negative CFI is common for growing companies (due to investment in assets).
Positive CFI could mean asset sales, which isn’t always good if core assets are being sold to generate cash
🔹 Key Metric: Capital Expenditure (CapEx) vs. Depreciation (Higher CapEx suggests business expansion, while low CapEx may signal stagnation)
🚨 Red Flag: Consistently negative CFI with declining revenues may indicate poor investment decisions
Includes capital expenditures (CapEx), acquisitions, and investments
Negative CFI is common for growing companies (due to investment in assets).
Positive CFI could mean asset sales, which isn’t always good if core assets are being sold to generate cash
🔹 Key Metric: Capital Expenditure (CapEx) vs. Depreciation (Higher CapEx suggests business expansion, while low CapEx may signal stagnation)
🚨 Red Flag: Consistently negative CFI with declining revenues may indicate poor investment decisions
(2.3) Cash Flow from Financing Activities (CFF)
Tracks cash from debt issuance/repayment, dividend payments, and stock buybacks.
Positive CFF suggests external funding (debt or equity) is being raised
Negative CFF means the company is repaying debt or distributing dividends
🔹 Key Metric: Debt Repayment vs. New Borrowings (A company relying too much on debt may face financial risk)
🚨 Red Flag: If a company repeatedly raises debt to cover operational cash shortfalls, it may indicate trouble
Tracks cash from debt issuance/repayment, dividend payments, and stock buybacks.
Positive CFF suggests external funding (debt or equity) is being raised
Negative CFF means the company is repaying debt or distributing dividends
🔹 Key Metric: Debt Repayment vs. New Borrowings (A company relying too much on debt may face financial risk)
🚨 Red Flag: If a company repeatedly raises debt to cover operational cash shortfalls, it may indicate trouble
(2.4) Check Free Cash Flow (FCF)
Free Cash Flow (FCF) = CFO - CapEx
Indicates how much cash is left after maintaining and expanding operations.
Positive FCF means a company can fund growth, pay dividends, or reduce debt.
🔹 Key Metric: FCF Yield = FCF / Market Capitalization (Higher yield = More efficient cash generation)
🚨 Red Flag: A profitable company with negative FCF for extended periods may struggle with liquidity
Free Cash Flow (FCF) = CFO - CapEx
Indicates how much cash is left after maintaining and expanding operations.
Positive FCF means a company can fund growth, pay dividends, or reduce debt.
🔹 Key Metric: FCF Yield = FCF / Market Capitalization (Higher yield = More efficient cash generation)
🚨 Red Flag: A profitable company with negative FCF for extended periods may struggle with liquidity
Healthy companies generate strong cash flow from operations and maintain positive FCF.
Growing companies may have negative investing cash flow due to expansion.
Struggling companies might rely heavily on financing activities for cash.
Growing companies may have negative investing cash flow due to expansion.
Struggling companies might rely heavily on financing activities for cash.
(3) Balance Sheet:
Provides a snapshot of a company’s financial position at a specific point in time. It helps investors evaluate a company's liquidity, financial stability, debt levels, and overall strength
A balance sheet consists of three key sections:
Assets (What the company owns)
Liabilities (What the company owes)
Shareholder’s Equity (Net worth of the company or the Book Value). It is this portion which is listed in the market and trades at market value and is known as Market Capitalization
Provides a snapshot of a company’s financial position at a specific point in time. It helps investors evaluate a company's liquidity, financial stability, debt levels, and overall strength
A balance sheet consists of three key sections:
Assets (What the company owns)
Liabilities (What the company owes)
Shareholder’s Equity (Net worth of the company or the Book Value). It is this portion which is listed in the market and trades at market value and is known as Market Capitalization
(3.1) Analyze Assets: Strength & Efficiency
Current Assets (Cash, accounts receivable, inventory): Measures short-term liquidity
Non-Current Assets (Property, machinery, goodwill): Indicates long-term investments.
Intangible Assets (Patents, brand value, goodwill): Important for tech & consumer brands.
🔹 Key Metric: Current Ratio = Current Assets / Current Liabilities (Ratio > 1 means the company can cover short-term liabilities)
🚨 Red Flag: A high amount of accounts receivable might indicate difficulty in collecting payments
Current Assets (Cash, accounts receivable, inventory): Measures short-term liquidity
Non-Current Assets (Property, machinery, goodwill): Indicates long-term investments.
Intangible Assets (Patents, brand value, goodwill): Important for tech & consumer brands.
🔹 Key Metric: Current Ratio = Current Assets / Current Liabilities (Ratio > 1 means the company can cover short-term liabilities)
🚨 Red Flag: A high amount of accounts receivable might indicate difficulty in collecting payments
(3.2) Examine Liabilities: Debt & Financial Health
Current Liabilities (Short-term debts, accounts payable): Should be covered by current assets
Long-Term Liabilities (Loans, bonds, pension obligations): High long-term debt can be risky
🔹 Key Metric: Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity (Lower ratio = Less reliance on borrowed funds)
🚨 Red Flag: A high debt-to-equity ratio suggests financial risk
Current Liabilities (Short-term debts, accounts payable): Should be covered by current assets
Long-Term Liabilities (Loans, bonds, pension obligations): High long-term debt can be risky
🔹 Key Metric: Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity (Lower ratio = Less reliance on borrowed funds)
🚨 Red Flag: A high debt-to-equity ratio suggests financial risk
(3.3) Evaluate Shareholders' Equity: Stability & Growth
Retained Earnings (Profits reinvested in the company): Indicates growth potential.
Common Stock & Reserves: Shows investor confidence in the company
🔹 Key Metric: Return on Equity (ROE) = Net Income / Shareholder’s Equity (Higher ROE = More efficient use of capital)
🚨 Red Flag: If equity is declining over time, the company might be facing financial trouble
Retained Earnings (Profits reinvested in the company): Indicates growth potential.
Common Stock & Reserves: Shows investor confidence in the company
🔹 Key Metric: Return on Equity (ROE) = Net Income / Shareholder’s Equity (Higher ROE = More efficient use of capital)
🚨 Red Flag: If equity is declining over time, the company might be facing financial trouble
(3.4) Check Liquidity & Working Capital
Working Capital = Current Assets - Current Liabilities
Positive working capital = Healthy liquidity
Negative working capital = Potential cash crunch (Not Always)
🔹 Key Metric: Quick Ratio = (Current Assets - Inventory) / Current Liabilities (Excludes inventory for a more realistic liquidity check)
🚨 Red Flag: A quick ratio below 1 indicates liquidity risk
Working Capital = Current Assets - Current Liabilities
Positive working capital = Healthy liquidity
Negative working capital = Potential cash crunch (Not Always)
🔹 Key Metric: Quick Ratio = (Current Assets - Inventory) / Current Liabilities (Excludes inventory for a more realistic liquidity check)
🚨 Red Flag: A quick ratio below 1 indicates liquidity risk
(3.5) Compare Asset Utilization & Efficiency
Measures how well a company utilizes its assets to generate revenue
🔹 Key Metric: Asset Turnover Ratio = Revenue / Total Assets (Higher ratio = Efficient use of assets)
🚨 Red Flag: A declining asset turnover ratio suggests inefficiency
Measures how well a company utilizes its assets to generate revenue
🔹 Key Metric: Asset Turnover Ratio = Revenue / Total Assets (Higher ratio = Efficient use of assets)
🚨 Red Flag: A declining asset turnover ratio suggests inefficiency
Thread #234 - That's a wrap!
If you found this useful:
(1) Follow @rohaninvestor & @Analyst_Mayank for more such threads.
(2) Bookmark this thread.
If you found this useful:
(1) Follow @rohaninvestor & @Analyst_Mayank for more such threads.
(2) Bookmark this thread.
https://x.com/rohaninvestor/status/1894953107060334679
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