How to Read a Company's Financial Statement

Reading a company's financial statement provides insight into a business's profits, losses and future goals. Small and large organizations alike produce annual and quarterly financial statements to illustrate and showcase successes while providing transparency concerning possible financial challenges. Several components of a financial statement, including the income statement, cash flow statement and balance sheet, fit together to provide an overall portrait of the company's performance. For investors and potential employees, a company's financial statement can present important information related to the current and future vitality of the business.

  1. 1.

    Review the discussion and analysis section. This section provides investors with an overview of current company initiatives and challenges. Review this section for information relevant to understanding changes that occurred from the previous reporting period and information related to future trends or known risks. Charts within this section can provide a visual representation of numerical and statistical results.

  2. 2.

    Review the balance sheet. Examine the assets and liabilities listed here. Assets can include equipment and inventory. Liabilities include short- and long-term debt. Owner's equity, or net worth, represents the difference between assets and liabilities. The balance sheet provides data for the current year and the previous year for comparison.

  3. 3.

    Review the income statement. Locate the net profit or net loss here. This number represents the difference between the revenue earned over a specific period and the expenses related to creating that revenue.

  4. 4.

    Review the cash flow statement. This provides insight into operating, financing and investment activities that affect the flow of cash into and out of the company. The statement includes details concerning loans received or paid, equipment purchased or sold and sales revenues. Analyze the cash flow statement to determine the amount of cash the company has available to cover expenses and continue operations.

  5. 5.

    Read the fine print. The footnotes to a company's financial statement provide additional information relevant to developing an overall understanding of the company's health and future profitability. Examine the footnotes for information related to deferred tax payments, pending lawsuits and significant changes in accounting procedures.