Even beginners in investing can understand: Starting from zero, master the core logic of corporate financial statements

▶ Why Even Buffett Is Obsessed with Analyzing Financial Statements?

What is the essence of investing? Simply put, it’s using today’s money to bet on future returns. But the future is full of uncertainties—how can you improve your chances of winning? Understanding corporate financial reports is one of the answers.

Buffett once said: “Financial reports are the language through which a company communicates with the outside world, a perfect and flawless language. Only those willing to spend time learning and analyzing it can independently choose investment targets. The amount of money you make in the stock market is proportional to your understanding of your investment objects.”

This is not an empty phrase. Through financial reports, you can see a company’s true cash-generating ability, debt pressure, and cash reserves. Do financial reports lie? Yes. But learning to read them at least helps you avoid obvious traps and filter out companies worth paying attention to.

▶ What exactly are financial reports? Why must listed companies disclose them?

Financial Reporting is a periodic public summary document that listed companies release about their operations. Think of it as the company’s “health check report”—how much they earned, how much they lost, who they owe money to, and how much cash they still have—all clear at a glance.

Why must they disclose? Because shareholders of listed companies are the general public. When you invest your money, you have the right to know how it’s being used. This is a fundamental system to protect investors. Depending on the listing jurisdiction, the frequency of disclosure varies:

U.S. listed companies are required to disclose annual reports (Form 10-K), and domestic companies must also submit quarterly reports (Form 10-Q). The annual report must be filed within four months after the fiscal year ends with the U.S. Securities and Exchange Commission (SEC).

Based on disclosure cycles, financial reports are divided into annual reports, quarterly reports, and monthly reports. Among these, the annual report is the most comprehensive, while quarterly reports are what investors check most frequently.

▶ The four pillars of financial reports: Balance Sheet, Income Statement, Cash Flow Statement, and Shareholders’ Equity Statement

To quickly understand a company, you need to master these four statements. They are like the four major systems of the human body—skeletal, digestive, circulatory, and immune systems—none can be missing.

1. Balance Sheet: The company’s “financial position”

The Balance Sheet, also called the Statement of Financial Position, directly reflects how much money a company has, owes, and where that money comes from.

For example: Xiao Wang decides to open a gym, investing 5 million. Of this, 3 million is from accumulated profits, and 2 million is borrowed from the bank. This 5 million is used to rent, renovate, and buy equipment, spending 4.5 million, leaving 0.5 million in cash.

From this example, we see: Assets = Liabilities + Shareholders’ Equity.

The left side is Assets (the economic resources the company owns and controls), and the right side is Liabilities (what it owes) plus Shareholders’ Equity (the actual ownership of shareholders).

How are assets classified?

By liquidity:

• Current Assets: Cash, accounts receivable, inventory (can be converted into cash within a short period)
• Non-current Assets: Factories, equipment, intangible assets (long-term or non-liquid assets)

Taking TSMC’s Q1 2025 as an example, current assets include cash and equivalents totaling NT$2,394.8 billion, up 41% from the same period in 2024, accounting for 34% of total assets. This indicates TSMC has ample cash reserves and the capacity to pay dividends steadily. Meanwhile, inventory increased by 9.8% compared to 2024, reflecting active production capacity.

Among non-current assets, real estate, factories, and equipment account for 48% of total assets—normal for a leading semiconductor manufacturer requiring astronomical equipment investments.

How are liabilities classified?

By repayment period:

• Current Liabilities: Debts due within one year (accounts payable, short-term loans)
• Long-term Liabilities: Debts due after more than one year (bonds payable, long-term loans)

A healthy company’s debt isn’t nonexistent but structured reasonably and covered by cash flow. For example, TSMC’s Q1 2025 current liabilities mainly consist of accounts payable and accrued wages, with minimal financial liabilities—these are “good debts.”

How to assess a company’s financial health?

Look at three indicators:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

• Measures the company’s ability to pay off short-term debts immediately
• Generally, a ratio around 1:1 is healthy
• TSMC’s Q1 2025 = NT$3,052.3 billion / NT$1,399.8 billion = 2.18 (far above standard, indicating strong debt-paying ability)

Debt Ratio = Total Liabilities / Total Assets × 100%

• The higher, the more leveraged and risky
• TSMC’s debt ratio has decreased from 40.37% in 2022 to 35.49% in Q1 2025, reflecting a more stable financial structure

Shareholders’ Equity = Total Assets - Total Liabilities

• Represents the actual value owned by shareholders
• Growth in equity indicates wealth accumulation

( 2. Income Statement: The company’s “report card” over a period

The Income Statement, also called the Profit and Loss Statement, records how much a company earned or lost during a specific period.

The basic formula: Operating Profit = Revenue - Costs and Expenses

The income statement is divided top-down into three layers:

1. Revenue — Money earned from selling products or providing services
2. Costs and Expenses — The costs incurred to earn that revenue
3. Net Profit — The actual profit after deducting all expenses

)# Revenue

TSMC’s Q1 2025 revenue netted NT$839.3 billion, a 41.6% year-over-year increase. Where does this growth come from? Mainly from soaring demand for AI chips. As the world’s largest foundry, TSMC’s orders are continuous.

Costs and Expenses

Revenue minus Cost of Goods Sold (COGS) equals Gross Profit. COGS includes direct manufacturing costs, while Expenses cover operational costs—selling, administrative, R&D.

Different industries have different expense structures. Tech companies spend heavily on R&D; retail companies on sales. TSMC, as a global leader in wafer manufacturing, had total operating expenses of NT$85.2 billion in Q1 2025, with R&D costs of NT$56.5 billion (6.7% of revenue). This ratio is declining year by year, which in a highly competitive environment is not a good sign.

Gross Margin and Net Margin

Gross Margin = Gross Profit / Operating Revenue

• Reflects the profitability of the company’s products
• High gross margin indicates strong product competitiveness and good cost control
• TSMC’s Q1 2025 gross margin is 58.8%, up from 53.1% in 2024—an increase of 5.7 percentage points—meaning each additional NT$100 of wafer sales adds more profit

Net Margin = Net Profit / Operating Revenue

• The ultimate indicator of profitability
• TSMC’s Q1 net profit grew by 60.2%, far exceeding the 41.6% revenue growth, indicating effective expense control and improved operational efficiency

3. Cash Flow Statement: Is the company really “making money”?

This statement is often overlooked but is the most revealing. Why? Because profits can be manipulated, but cash flow cannot lie.

The cash flow statement is divided into three parts:

Operating Cash Flow: Cash generated from daily operations

• Income: Cash received from sales and services
• Expenses: Procurement costs, employee wages, taxes

Investing Cash Flow: Cash from or used in investment activities

• Selling assets, recovering investments, buying stocks or bonds

Financing Cash Flow: Cash from financing activities

• Bank loans, bond issuance, attracting investments

For example: A company starts the year with NT$1 million in cash and ends with NT$5 million. Where does this NT$4 million increase come from?

• If from operating activities, it shows the business is profitable
• If from financing, it indicates borrowing large sums
• If from investing, it suggests asset sales or investment gains

All three can increase cash, but they reflect very different company states.

TSMC’s 2022 cash flow shows typical healthy characteristics:

• Operating Cash Flow: Net inflow of NT$1,610.6 billion (actual earnings)
• Investing Cash Flow: Net outflow of NT$1,190.9 billion (expanding investments)
• Financing Cash Flow: Net outflow of NT$200.2 billion (debt repayment and shareholder dividends)

This combination indicates a stable business, ample cash, ongoing large-scale capital investments, and debt repayment or shareholder returns.

How to quickly assess a company’s status?

4. Shareholders’ Equity Statement: How does shareholders’ money change?

The Shareholders’ Equity Statement records the changes in owners’ equity—how much shareholders have invested and how the company’s operations have affected that.

Shareholders’ equity includes:

• Share Capital: Initial capital invested by shareholders
• Capital Surplus: Premium from issuing shares
• Retained Earnings: Profits retained in the company
• Unappropriated Earnings: Profits not distributed as dividends

Why focus on this? Because it shows how profits are allocated:

• Distributing all profits to shareholders means no reinvestment
• Retaining all profits means shareholders get no immediate returns
• A balanced approach supports growth and shareholder returns

TSMC adopts a stable quarterly dividend policy—paying dividends each quarter. This indicates steady profitability, ample cash, and management confidence in future prospects.

▶ Three common misconceptions when reading financial reports

Misconception 1: Overtrust in financial data

Financial reports only record past events. They tell you how much the company earned yesterday but cannot precisely predict tomorrow.

Moreover, not all value can be expressed numerically. A company’s brand value, R&D strength, market position—these are crucial but hard to quantify in financial statements.

Most dangerously—financial reports can be falsified. The Luckin Coffee fraud, inflating sales by NT$2 billion, happened years ago, but similar frauds still occur. Therefore, when analyzing financial reports, combine industry background, company news, and market rumors for triangulation.

Misconception 2: Rigidly applying financial ratios

Ratios are static; the business environment is dynamic.

For example, real estate companies naturally have low current ratios (assets mainly in property), but that doesn’t mean poor management. During big promotions, companies might stockpile inventory, temporarily lowering inventory turnover, but that’s short-term. Don’t judge efficiency solely based on ratios.

Ratios are only references, not definitive judgments.

Misconception 3: Only focusing on the four main reports and ignoring other info

Besides financial statements, companies also include:

• Operational metrics: User numbers, daily active users (internet companies), new store openings (retail)
• Future plans: New product launches, market expansion strategies
• Dividend policies: Stable dividends, payout ratios

These often better reflect the company’s development direction than just numbers.

▶ How should novice investors use financial reports to make decisions?

Step 1: Quickly scan the Balance Sheet

• Is cash sufficient? (Current assets enough to cover short-term liabilities)
• Is debt pressure high? (Is the debt ratio too high?)

Step 2: Carefully read the Income Statement

• Is revenue growing? Is the growth accelerating or slowing?
• How are gross margin and net margin changing? Is profit growth outpacing revenue growth?

Step 3: Observe cash flow

• Where does the main cash come from? (Operations, investments, or financing)
• What is the company doing? (Expansion, dividends, debt repayment)

Step 4: Combine with shareholders’ equity and other info

• How are profits distributed?
• What’s the future development plan?

Finally, compare with peers, across years, and incorporate latest news—don’t draw conclusions from a single financial report alone.

▶ Where to find listed companies’ financial reports?

• Company official website: Go to Investor Relations section for latest disclosures
• Stock exchange websites: Taiwan’s listed companies on TWSE, US companies on SEC website
• Financial platforms: Many sites compile summaries and key indicators of financial reports

Closing remarks

Mastering the basics of reading financial reports won’t make you the next Buffett, but it will help you avoid obvious investment traps and identify companies with real cash-generating ability. Financial reports are fundamental tools for investment decisions, not the only tools.

Combine fundamental analysis, market environment, and industry trends to make more rational investment choices.