Financial Statements: The Tool Every Investor Needs to Know Inside Out

In the world of investing filled with information, sometimes we need to make decisions based on real numbers—actual data—without relying solely on analysis or technical chart trends. This is where financial statements become a tool that many investors overlook, even though they are the most valuable source of information.

Financial statements are summarized documents that companies/organizations prepare to show an overview of their financial position over a period: how much profit or loss they made, how cash flows in and out, and the amount of assets and liabilities.

Why are financial statements important to investors?

Deciding to buy stocks without reviewing financial statements is like driving in the dark without headlights—you might reach your destination, but the risk is quite high.

Assessing the company’s financial health: Financial statements tell you how many assets the company has, how much debt, and what the net assets are. Tracking these trends over 3-5 years helps you see if the company is strengthening or weakening.

Identifying opportunities and risks: If production costs rise but selling prices stay the same, profit margins will be squeezed. If liabilities grow faster than assets, that’s a warning sign.

Planning funding strategies: Banks and investors look at financial statements. If you want to borrow money or attract investment, your financial statements are your credit report.

What are the components of financial statements?

There are 3 main parts that investors need to understand:

1. Income Statement( (Profit and Loss Statement)

This shows “Revenue - Expenses = Net Profit” in a professional format.

Components:

• Total Revenue: All income earned by the company )before deducting any expenses(
• Cost of Goods Sold: Money spent on producing or purchasing goods
• Operating Expenses: Salaries, rent, advertising, etc.
• Interest and Taxes: Deducted from profit before tax
• Net Profit: The actual profit the company earns

Ask 3 key questions:

• Is revenue growing year-over-year? Compared to last year?
• Are expenses increasing or under control? If profit grows but expenses grow faster, that indicates a problem.
• How has profitability changed? )Compare Profit Margin between years(

) 2. Balance Sheet### (Statement of Financial Position)

This is a “snapshot” of the company’s resources and liabilities at a specific date (usually year-end)

Basic equation: Assets = Liabilities + Shareholders’ Equity

Main components:

• Current Assets: Cash, accounts receivable, inventory (usable within 1 year)
• Non-current Assets: Land, buildings, machinery (long-term)
• Current Liabilities: Payable within 1 year
• Non-current Liabilities: Long-term loans
• Equity: Share capital + retained earnings - accumulated losses

Ask 3 questions:

• Does the company have enough resources to cover short-term liabilities? (Current Assets > Current Liabilities)
• Is the debt-to-assets ratio balanced? (If debt > assets by 70%, it’s risky)
• Is shareholders’ equity increasing or decreasing? (Reflects wealth creation)

( 3. Cash Flow Statement) (Statement of Cash Flows)

Cash is the blood of the company. Checks and cash flow don’t help if the company’s cash position isn’t healthy.

This statement shows where the company’s cash has come from and gone to.

Divided into 3 sections:

• Operating Activities: Cash from selling goods/services ###most important(
• Investing Activities: Cash used to buy or sell assets like machinery
• Financing Activities: Borrowing, debt repayment, dividends

Ask 3 questions:

• Does operating cash flow generate positive cash? )This number is most critical - if profit increases but cash decreases, beware!(
• How much is the company investing in itself? )Heavy investment could mean growth or bad signals; need to see the context(
• Where do dividends and debt repayments come from? )From profits or additional borrowing?(

Pros and cons of reading financial statements

) Advantages

Factual data: Numbers in financial statements are verified (for listed companies), making them more reliable than rumors or hearsay.

Comparability: Investors can compare with competitors or industry averages to see who performs best.

Long-term planning: Looking at 3-5 year trends helps you see the company’s direction.

Key metrics: You can calculate ROE, Debt-to-Equity, Current Ratio, etc. All useful.

Disadvantages

Historical data: Financial statements are usually 3-4 months behind the fiscal year-end. Markets change fast, and new events may occur.

Manipulation possible: Some companies use accounting tricks to make numbers look better (legally, but still deceptive)

Requires understanding: Not everyone can interpret numbers easily; basic accounting knowledge is needed.

Numbers ≠ future value: A company may have good financials now, but market conditions can change.

Other important parts to know

Changes in Equity( (Statement of Changes in Equity)

This records how shareholders’ equity changes over the year and why.

Events that change equity:

• Issuance of new shares )capital increase###
• Retained earnings (if profit, equity increases)
• Dividend payments (reduce equity)
• Accumulated losses (reduce equity)

( Comprehensive Income) (Statement of Comprehensive Income)

Includes:

• Net profit/loss: From normal business operations
• Other comprehensive income: e.g., currency translation adjustments, gains/losses on investments, etc.

The key is to see whether core business is truly profitable or if profits come from extraordinary events.

( Non-profit financial statements) (NGO/Associations)

These have different formats:

• Record donations, grants, subsidies
• Record expenses by activity, not by business segment
• No net profit, but end with cash balance

How to find and read US stock financial statements

Where to find them?

Company websites: Investor Relations sections often have 10-K (annual reports) and 10-Q ###quarterly reports(

SEC website: )sec.gov### — official source for US-listed companies

Financial data platforms: Investing.com, Yahoo Finance, Google Finance, Bloomberg — all display financials and charts

Bank/broker databases: Some offer research and analysis tools

( Where to look when reading financial statements?

1. Revenue stability: Is revenue steadily increasing year-over-year or fluctuating?
2. Operational efficiency: What is the profit margin? Is it improving or declining?
3. Profit quality: Is profit from core operations or extraordinary items?
4. Cash flow: Profit but no cash flow is a warning sign.
5. Debt trend: Increasing debt faster than profit growth is risky.

Sample questions to ask

• Balance Sheet: What is the total value of assets today? Total liabilities? Shareholders’ equity?
• Income Statement: What is the profit or loss this year? How does it compare to last year?
• Cash Flow: Is operating cash flow positive? How does the company use cash?
• Financial ratios: Debt ratio, liquidity ratios—are they good or bad?
• Risks: Are there factors that could weaken the financial position?

Investing in US stocks after analyzing financial statements

Besides direct stock purchases, investors can consider CFD )Contract for Difference( trading.

Advantages of CFDs:

• Leverage: Invest 1 controls up to 20 )depending on regulations(; potential for higher gains
• Bidirectional trading: Can profit from both rising and falling markets
• Liquidity: Can sell instantly without finding a buyer
• Lower costs: No need to pay for borrowing funds
• Suitable for day trading: No traditional trading restrictions

Comparison: CFD vs. traditional stocks

Caution: Leverage amplifies both gains and losses. Use it wisely.

Summary

Financial statements are not boring documents—they are the “health cards” of a company, telling you:

• Is the company thriving or struggling?
• What risks does it face?
• What is its future outlook?

Skilled investors are not just good at reading charts but deeply understand the numbers.

By learning to read and analyze financial statements correctly, and using appropriate investment tools (whether traditional stocks or CFDs), you will have enough information to plan reasonable investments and increase your chances of success in the market.