Financial statements are the primary tools used to understand the economic reality of a business. They translate business activity into structured numerical reports that allow investors, analysts, and managers to assess profitability, financial strength, and cash generation over time.
Although companies produce many disclosures, the core financial picture is captured by three statements. Each answers a different question, and none should be analyzed in isolation. Together, they form a coherent representation of how a business earns money, how it is financed, and how cash moves through the enterprise.
The income statement tells us how much money the company earned during a set period of time. It measures performance over an interval, typically a quarter or a full fiscal year.
Companies traditionally generate income statements for shareholders every three months and for the full fiscal year. From this statement, it is possible to analyze revenues, operating costs, margins, and net earnings. These figures allow one to assess pricing power, cost discipline, and scalability of the business model.
From a value-investing perspective, the income statement is central for evaluating the consistency and direction of earnings over time. Stable margins, persistent profitability, and steady growth are often indicators that the company may benefit from a durable competitive advantage.
You can find an example and detailed breakdown here.
The balance sheet provides a snapshot of the company’s financial position at a specific point in time. It tells us what the company owns, what it owes, and the residual value attributable to shareholders.
In practical terms, the balance sheet shows the amount of cash on hand, the level of receivables and assets, and the structure of liabilities and long-term debt. Subtracting liabilities from assets yields the company’s net worth, also referred to as shareholders’ equity.
Companies typically publish balance sheets at the end of each quarter and at the end of the fiscal year. Certain balance sheet items, such as excess cash, low leverage, or conservative financing, can signal financial resilience and, in some cases, the presence of a durable competitive advantage.
A detailed explanation and example are available here.
The cash flow statement tracks the actual movement of cash into and out of the business over a given period. Unlike the income statement, it is not affected by accounting conventions such as accruals or depreciation.
This statement is particularly useful for understanding how much cash the business generates from operations, how much is reinvested in capital expenditures, and how the company finances itself through debt issuance, equity issuance, dividends, or share buybacks.
Companies usually issue the cash flow statement alongside the income statement and balance sheet. For long-term investors, sustained operating cash flow and disciplined capital allocation are often more informative than reported earnings alone.
An example with detailed commentary can be found here.
GRAHAM, Benjamin, ZWEIG, Jason and BUFFETT, Warren E., 2006. The Intelligent Investor Rev Ed.: The Definitive Book on Value Investing. Revised ed. edition. New York: Harper Business. ISBN 978-0-06-055566-5.
GRAHAM, Benjamin, MEREDITH, Spencer B. and PRICE, Michael F., 1998. The Interpretation of Financial Statements. New York: Harper Business. ISBN 978-0-88730-913-7.
GRAHAM, Benjamin and DODD, David, 2002. Security Analysis: Principles and Techniques. 2nd edition. New York: McGraw Hill. ISBN 978-0-07-141228-5.
BUFFETT, Mary and CLARK, David, 2008. Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage. New York: Scribner. ISBN 978-1-4165-7318-0.