The Three Financial Statements
Every publicly listed company must publish three core financial statements each quarter and year. Together, they tell the complete story of a business.
1. The Income Statement (P&L)
Shows revenues, costs, and profit over a period (quarter or year).
Key line items (top to bottom): - Revenue / Net Sales - money earned from customers - Cost of Goods Sold (COGS) - direct cost to produce the product/service - Gross Profit = Revenue − COGS - Operating Expenses - salaries, rent, marketing, R&D - EBIT = Gross Profit − Operating Expenses (earnings before interest & tax) - Interest Expense - cost of debt - PAT / Net Profit = EBIT − Interest − Tax
Gross margin = Gross Profit / Revenue. High gross margins (>50%) signal pricing power.
2. The Balance Sheet
A snapshot of what the company owns (assets) and owes (liabilities) at a point in time.
Assets = Liabilities + Equity - always.
- •Current Assets - cash, inventory, receivables (convertible within 12 months)
- •Non-Current Assets - property, plant & equipment, intangibles
- •Current Liabilities - payables, short-term debt (due within 12 months)
- •Long-Term Debt - bonds, loans due after 12 months
- •Shareholder Equity = Total Assets − Total Liabilities
3. The Cash Flow Statement
Profit can be manufactured through accounting choices. Cash cannot. The cash flow statement shows actual money in and out.
Three sections: - Operating Cash Flow (OCF) - cash generated by the business (most important) - Investing Cash Flow - capex, acquisitions, asset sales - Financing Cash Flow - debt raised/repaid, dividends, share buybacks
Free Cash Flow (FCF) = OCF − Capex - the cash left after maintaining/growing the business. This is what ultimately funds dividends and buybacks.
How They Connect
Net profit flows from the income statement into retained earnings on the balance sheet. Changes in working capital connect the income statement to the cash flow statement. A business can show accounting profit while burning cash - the cash flow statement reveals the truth.
Key Takeaways
- •The income statement shows profitability; the balance sheet shows financial position; the cash flow statement shows reality
- •Always read all three together - no single statement tells the full story
- •When profit and cash flow diverge, trust the cash flow statement