Understanding financial statements and ratios

A company's financial statements are a window into its financial health. No wonder studying them is an integral part of fundamental analysis. While analysts dig deeper into financial statements and try to unearth the not-so-obvious aspects of a company's financials, for an investor, understanding basic financial statements should suffice in most cases. There are three major financial statements: the balance sheet, profit-and-loss statement and cash-flow statement. The balance sheet tells you about the assets and liabilities of a company. The profit-and-loss statement tells you about a company's profitability. And the cash-flow statement is about the flow of cash into and out of the company. Balance sheet The balance sheet is called so because it always balances according to this relation: Assets = Liabilities + Owners' equity A balance sheet that doesn't balance is simply wrong. The balance sheet shows the assets that a business owns, the liabilities that it owes and the funds contributed by its shareholders. Assets include land, equipment, inventory, goodwill, patents, brand value, etc. Liabilities include debt (long term and short term) and any other payables that a business has. Shareholder funds are in form of equity and reserves. A weak balance sheet is one that is saddled with debt. When a bu

This article was originally published on November 16, 2020.