29 May 2017

How To Read A Financial Statement

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There are two sets of financial statements, the income statement and the balance sheet, and they work in concert. If you want to get to the health of a company, you have to look at both. What we have here is an income statement. It’s going to take you through things like revenue and expenses and tell you about the profitability of the company. That profitability generally turns into cash flow and brings you to the balance sheet.

The more years of financial data you can get, the better, because you get to see a flow. You look at things like revenue, and you look at expenses, and you can start to ask, “What happened year to year?” and start looking at the deltas between the numbers. That’s one methodology for looking at a business.

Another is to simply take the expenses and say, “If you’ve got $1 of revenue and 80¢ of expenses and your profit is 20¢, just tell me what you spend the 80¢ on.” How much on sales? How much on overhead? How much of it do you spend on R&D?

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