Unlocking Financial Health: Income, Balance Sheet & Cash Flow Analysis

Unlocking financial health1

Income Statement Examination

An income statement is a financial report that displays a company's earnings and expenses for a particular period. It enables you to determine how well the company is operating financially and whether or not it is profitable. It is a necessary document for determining a company's financial success.  

When evaluating a company's income statement, there are several factors that one should consider.

  1. Revenue growth rate: The revenue growth rate shows how quickly the company's revenue is increasing over time. If the revenue is growing at a steady rate, it is a good sign of a healthy business.
  2. Diversified revenue sources: A company with diversified revenue sources is less risky than one relying on just one or two sources. You can find revenue sources in the most recent 10-Q filing.
  3. The cost of goods sold (COGS): is how much money a company spent to make or offer its products or services. If the company earns a lot more money than it spent, that's good. It depends on what kind of products or services the company has to offer.
  4. Operating expenses: The operating expenses show how much the company is spending on things like salaries, rent, and marketing. Check the operating profit margin, which is the percentage of sales left after subtracting COGS and operating expenses. If a company has a high operating profit margin, it suggests that it is producing considerable profit in comparison to its expenses, demonstrating effectiveness and expandability.
  5. Net income: is how much money a company has earned after taking away all its expenses. Look at the net profit margin, which is how much profit a company makes compared to how much money it earned. If the company makes a lot more profit than the money it earned, that's good.

Balance Sheet Examination

A balance sheet is a financial document that provides an overview of a company's financial situation at a particular moment. It displays what the company owns (such as cash and things like machines), what it owes to others (such as debts), and what's left for the people who own the company. By examining a balance sheet, you can tell if a company is doing financially well.

To analyze a balance sheet, there are specific significant factors that you need to consider: 

  1. Assets: These are valuable assets owned by a company, such as cash, real estate, or equipment. Checking a company's assets can show if it has enough money to pay its debts now and in the future. If a company has a lot of cash, it can handle any financial problems that may come up soon.
  2. Liabilities: These are the debts and financial obligations a company has to pay back, like loans, bills, or taxes. It's important to look at the different types of liabilities a company has to see how much it owes and if it can pay back its debts. If a company has a lot of debt, it may not be able to pay back its loans, which can be a problem.
  3. Equity: This is what's left over for the owners after all the debts are paid. Looking at a company's equity is important to see who owns it and how flexible it is with its money. If a company has extra money, it can reinvest it in the business or pay dividends to shareholders.
  4. Ratios: These are tools that can help you understand a company's finances. Some common ratios are the debt-to-equity ratio, current ratio, and quick ratio. They show how much debt a company has compared to its equity, and how easily it can pay its bills.
  5. Trends: Looking at a company's balance sheet over time can help you see if it's doing well financially. If its debt is going up, it may be in trouble. But if its equity is growing, it may be doing well. It's important to track these trends to make good decisions about the company's financial health.

Assessing the Cash Flow Statement

A cash flow statement is a financial document that demonstrates the amount of money a company generated and used during a particular timeframe. It breaks down where the money came from and where it went. This helps people who invest in or own the company understand how financially healthy it is. 

  1. Operating activities: This part shows how much money the company earned or spent from its main business. If the company is earning more than it is spending, that's good news.
  2. Investing activities: This part shows how much money the company spent on things like new equipment or other companies. Spending a lot of money in this section can be a sign that the company is growing, but it can also mean that it is spending more money than it can afford.
  3. Financing activities: This part shows how much money the company spent on things like paying off loans or paying dividends to its owners. If the company is earning more money than it's spending in this area, that can be a sign of financial stability, but borrowing too much money can be a problem.
  4. Net change in cash: This shows if the company has more or less money than it did at the beginning of the time period. If the net change in cash is positive, that's good news. But if it's too big, it can mean the company isn't investing enough to stay competitive in the long run.