Breaking Down Financial Statements

Whether you’re a seasoned investor or just trying to get a better handle on finance, understanding financial statements is a skill worth having in your toolkit.

Sure, they can look like a mess of numbers at first, but once you know what you’re looking at, they’re one of the best ways to size up a company. Let’s break them down simply.

Income Statement

The income statement shows how much a company made, spent, and kept over a certain period, usually a quarter or a year. It’s often called the Profit & Loss (P&L) statement.

1. Revenue (Sales): This is the total money the company brings in from its main business, selling products or services.
2. Expenses: The costs of running the business. Think wages, rent, utilities. Basically what it takes to keep the lights on.
3. Net Income (Profit): What’s left after expenses. If it’s a positive number, the company made a profit. If it’s in parentheses, that’s a loss.

Balance Sheet

The balance sheet is a snapshot of a company’s financial health. It shows what it owns, what it owes, and what’s left for shareholders.

1. Assets: What the company owns. Examples include cash, buildings, inventory, land, etc.
2. Liabilities: What it owes, including loans, unpaid bills, or anything else that needs to be paid back.
3. Equity: What’s left over if the company sold everything and paid off its debts.

Cash Flow Statement

This one’s all about the movement of cash, essentially what’s coming in and what’s going out during a specific period. It’s split into three parts:

1. Operating Activities: Cash from day-to-day business like sales, marketing, and admin. If this is consistently negative, that’s a red flag.
2. Investing Activities: Cash used for big purchases like equipment or property
3. Financing Activities: Cash related to raising or returning money, such as borrowing, repaying debt, buying back stock, or paying dividends.

Apple (AAPL Quick QuoteAAPL - Free Report) is often referred to as the ‘cash king’ thanks to its immense cash-generating abilities. Free cash flow of $26.5 billion grew 60% year-over-year throughout its latest release, continuing the historical trend nicely.

Bottom Line

Financial statements can seem intimidating, but once you get used to them, they’re very helpful. Investors don’t need to memorize every line but rather just focus on the few big things that actually tell the story.