Key Takeaways
- 1Three financial statements tell the complete story of a company
- 2The income statement shows profitability over a period
- 3The balance sheet shows financial position at a point in time
- 4The cash flow statement shows actual cash movement
- 5Focus on trends over multiple quarters, not single snapshots
#The Three Financial Statements
1. Income Statement (Profit and Loss)
The income statement shows how much money the company made or lost over a specific period (quarter or year).
Structure (top to bottom):
| Line Item | What It Means |
|---|---|
| Revenue | Total sales |
| Cost of Goods Sold (COGS) | Direct costs of producing goods/services |
| Gross Profit | Revenue minus COGS |
| Operating Expenses | R&D, sales, marketing, admin costs |
| Operating Income | Gross profit minus operating expenses |
| Interest Expense | Cost of debt |
| Net Income | Bottom line — total profit after all costs and taxes |
Key ratios from the income statement:
- Gross Margin = Gross Profit / Revenue Learn more →
- Operating Margin = Operating Income / Revenue
- Net Margin = Net Income / Revenue
- EPS = Net Income / Shares Outstanding Learn more →
2. Balance Sheet
The balance sheet shows what the company owns and owes at a specific moment.
The fundamental equation: Assets = Liabilities + Shareholders' Equity
| Section | Key Items |
|---|---|
| Assets | Cash, inventory, property, equipment, intangibles |
| Liabilities | Short-term debt, long-term debt, accounts payable |
| Equity | Retained earnings, paid-in capital |
Key ratios from the balance sheet:
- Current Ratio = Current Assets / Current Liabilities Learn more →
- Debt-to-Equity = Total Debt / Shareholders' Equity
- Book Value Per Share = Equity / Shares Outstanding
3. Cash Flow Statement
The cash flow statement shows actual cash moving in and out of the business. This is crucial because accounting earnings can be manipulated, but cash is real.
| Section | What It Shows |
|---|---|
| Operating Cash Flow | Cash from core business operations |
| Investing Cash Flow | Capital expenditures, acquisitions, investments |
| Financing Cash Flow | Debt issuance/repayment, dividends, buybacks |
Key metric: Free Cash Flow = Operating Cash Flow - Capital Expenditures
#Red Flags in Financial Statements
Watch for these warning signs:
- 1Revenue growing but cash flow declining — Possible accounting manipulation
- 2Rapidly increasing receivables — May indicate channel stuffing
- 3Debt growing faster than revenue — Unsustainable expansion
- 4Stock-based compensation exploding — Hidden shareholder dilution
- 5Declining margins over multiple quarters — Competitive pressure
#How Our Model Uses Financial Data
Our factor model automatically processes financial statement data for all 3,000+ stocks:
- Profitability factor uses income statement margins and returns
- Value factor uses balance sheet book value and income statement earnings
- Investment factor uses balance sheet asset growth
- Stability factor uses balance sheet leverage ratios
Last updated: February 10, 2026