How much is a financial statement analysis worth? Buffett tells you the answer

When it comes to analyzing financial reports, 99% of retail investors get it wrong. But if you want to make steady money from the stock market, this is an essential course.

Warren Buffett once said: The amount of money you make in the stock market is directly proportional to your understanding of the investment target. The most direct way to understand a company is to read and analyze its financial statements.

What is a financial report? Explained in one sentence

Financial report is like a health check-up report for a listed company. Every quarter, the company must disclose a document that records how much it earned, how much debt it owes, how much cash it has—these data directly reflect the company’s health.

The U.S. SEC requires all listed companies to regularly disclose financial reports: annual reports (Form 10-K) must be filed, and quarterly reports (Form 10-Q) are also required. The rules are strict because it concerns investors’ money.

Core of financial statement analysis: mastering four statements is enough

The most important part of a financial report is these four statements. Master the logic behind these four, and you’ll be able to make a preliminary assessment of a company.

Balance Sheet: How much money does the company have

Simplest formula: Assets = Liabilities + Shareholders’ Equity

Imagine you invest 5 million to open a gym. Of this, 3 million is earned by yourself (shareholders’ equity), and 2 million is borrowed from the bank (liabilities). These 5 million are used for rent, renovation, equipment (assets). The balance sheet records the sources and forms of these funds.

Assets are divided into two categories:

• Current Assets: Can be converted into cash in the short term, such as bank deposits, accounts receivable
• Non-current Assets: Difficult to liquidate immediately, such as factories, equipment

Liabilities are also divided into two categories:

• Current Liabilities: Due within one year, such as accounts payable
• Long-term Liabilities: Long-term loans, corporate bonds

Taking TSMC’s Q1 2025 as an example:

• Cash and cash equivalents amount to NT$23,948 billion, up 41% year-over-year, accounting for 34% of total assets
• This indicates TSMC has sufficient cash to maintain stable dividend payments
• Non-current assets account for 48% of total assets, mainly advanced wafer manufacturing equipment

Key ratios to watch:

• Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities. TSMC’s ratio is 2.18, well above the healthy threshold of 1.0, indicating strong short-term solvency
• Debt-to-Asset Ratio = Total Liabilities ÷ Total Assets. TSMC’s ratio decreased from 40.37% in 2022 to 35.49% in Q1 2025, showing decreasing financial leverage and risk

( Income Statement: Is the company really making money?

Formula: Net Profit = Revenue - Cost - Expenses - Taxes

This is the most closely watched statement in the market. You need to see clearly: where does the company make money, and where does it burn cash?

Three key figures:

1. Operating Revenue — Money from main business TSMC’s net revenue in Q1 2025 was NT$8,393 billion, up 41.6% year-over-year. This is a hard indicator, representing market demand for it.

2. Costs and Expenses — How much profit is consumed Cost refers to direct expenses of production, expenses include R&D, sales, administrative costs. TSMC’s R&D expenses are NT$56.5 billion, accounting for 6.7%. Is this money well spent? It depends on whether the company can maintain competitiveness.

Note a detail: Expenses are controllable. Companies can cut costs through layoffs, salary reductions, process optimization. But beware—some companies manipulate financial reports in the short term, which can harm long-term competitiveness.

3. Net Profit — How much is actually earned TSMC’s net profit in Q1 2025 was NT$3,607 billion, up 60.2% year-over-year. The key point is: Net profit growth (60.2%) exceeds revenue growth (41.6%), indicating the company is not only expanding sales but also improving efficiency.

Two ratios to watch:

• Gross Profit Margin = Gross Profit ÷ Operating Revenue. TSMC’s Q1 2025 gross margin is 58.8%, up from 53.1% in 2024, an increase of 5.7 percentage points. The higher the gross margin, the stronger the product competitiveness.
• Net Profit Margin = Net Profit ÷ Operating Revenue. This shows the company’s ultimate profitability, i.e., how much profit remains after all costs.

) Cash Flow Statement: Is the money really coming in?

This is the most overlooked but most real statement.

The income statement shows profit, but the cash flow statement proves whether the money actually entered the pocket. Some companies have high accounting profits but pile up accounts receivable, resulting in poor cash flow.

Three types of cash flows:

• Operating Cash Flow: Cash generated from main business. This is the most important, representing the company’s “blood-making ability”
• Investing Cash Flow: Cash from investments, mergers, asset sales
• Financing Cash Flow: Cash from borrowing, issuing bonds, raising capital. This money needs to be repaid, so be cautious

Quick way to assess a company:

The best scenario is: positive operating cash flow (main business makes money), negative investing cash flow (expanding investments), negative financing cash flow (repaying debt, dividends). This indicates the company is self-sufficient and capable of rewarding shareholders.

TSMC’s 2022 performance was like this: net inflow of NT$16,106 billion from operating cash flow, with net outflows of NT$11,909 billion and NT$2,002 billion from investing and financing cash flows respectively. In simple terms, it uses operating profits to expand investments and reward shareholders, with no financing pressure.

Shareholders’ Equity Change Statement: Is your investment appreciating?

Formula: Shareholders’ Equity = Assets - Liabilities

This statement reflects how shareholders’ investments change within the company. It includes several parts:

• Share Capital: Capital raised from initial stock issuance. Stock price increases do not affect the share capital number, but issuing new shares, rights issues, or stock splits will change the total share count.
• Capital Surplus: The premium from issuing shares above par value
• Retained Earnings: Profits retained in the company, not distributed as dividends
• Unappropriated Profits: Profits earned but not distributed
• Other Equity: For example, appreciation of holdings in other companies

An increasing shareholders’ equity indicates the company is creating value. Conversely, if shareholders’ equity shrinks, be alert.

Why do some investors get it wrong? Four pitfalls of financial reports

1. Financial reports are historical data and do not reflect the future

Past profits do not guarantee future earnings. Market changes, increased competition, industry cycles—these can alter the company’s trajectory.

2. Financial data is incomplete

Some important information companies can choose not to disclose. For example, user numbers, market share, R&D progress—these are hard to quantify but critically important.

3. Financial reports may be “beautified”

Companies may manipulate data to attract investors. The most extreme example is Luckin Coffee: inflating sales by 2 billion RMB, along with corresponding costs and expenses. After exposure, the stock collapsed.

4. Financial ratios vary by industry

A current ratio of 2:1 and quick ratio of 1.0 are considered “healthy.” But real estate companies naturally have poor liquidity, with average current ratios well below 2. Using large cash sales industries or those with almost zero accounts receivable cannot be blindly compared.

Bottom line: Financial statement analysis is an important tool, but do not rely solely on financial reports. You also need to consider the company’s competitive position, industry outlook, management capability, and non-financial indicators (users, capacity, market share, etc.).

How to quickly access financial reports

• Company official website: First to publish the latest financial reports and earnings conference materials
• Local stock exchange: Taking TSMC as an example, all periodic reports can be found on the Taiwan Stock Exchange
• Announcement query websites: Such as the “Public Information Observation Station” of the Taiwan Stock Exchange

Final words: Learning to read financial statements won’t make you Warren Buffett, but it can help you avoid many pitfalls. Once you master the logic of the four statements, you’ll have an extra “sharp eye” when selecting stocks.