Three documents sum up a company's financial health. Being able to read them, even roughly, is what turns a speculator into an investor.
1. The income statement: performance
It traces activity over a period: from revenue (the top) down to net profit (the bottom), by way of costs, operating margin and taxes. It answers: is the company making money, and at what margin?
2. The balance sheet: solidity
A snapshot at a point in time: on one side what the company owns (assets), on the other what it owes (liabilities) and what belongs to shareholders (equity). It answers: is the company solid or fragile? Too much debt can kill a good company.
3. The cash flow statement: the truth of cash
It follows the money actually received and paid out. It is the hardest to manipulate through accounting, and therefore often the most honest. A company can report a profit while burning cash — a major warning sign.
Profit ≠ cash
Accounting profit includes non-cash items (depreciation, provisions). A company profitable “on paper” that generates no cash deserves the greatest caution.
À retenir
- ✓Income statement = performance; balance sheet = solidity; cash flow statement = real cash.
- ✓Debt on the balance sheet is the first source of fragility to check.
- ✓Cash flow is the arbiter: be wary of profit without cash.