A company in three documents
Every public company files three core statements. Together they answer three questions: is it selling and profiting (income statement), what does it own and owe (balance sheet), and where is the cash actually going (cash flow statement).
You can read all three free in any company’s quarterly (10-Q) and annual (10-K) filings, and your app summarizes the highlights. You only need the shape of each, not an accounting degree.
From sales to profit, one waterfall
Money enters as revenue at the top, costs eat it in stages, and whatever survives at the bottom is net income, the famous bottom line.
Slide the costs and watch the profit survive, or not
The stages have names. Revenue minus cost of goods is gross profit. Minus operating costs (salaries, rent, marketing, research) is operating profit. Minus interest and tax is net income. Each stage divided by revenue is a margin, and healthy companies keep margins steady or growing.
What it owns minus what it owes
A snapshot on one day: assets (cash, factories, inventory) on one side, liabilities (debt, bills) on the other. The difference belongs to shareholders: equity.
Assets are fixed at $100. Slide the debt and watch equity get squeezed.
A little debt is normal fuel. A lot makes the company fragile: interest must be paid in good years and bad, and in a downturn the equity slice is what shrinks first. That slice is what your shares are a claim on.
Profit is an opinion, cash is a fact
Accounting profit involves estimates and timing. The cash flow statement ignores all that and tracks actual money moving, in three buckets.
Operating cash flow
Cash generated by the actual business. The healthiest companies gush it, quarter after quarter.
Investing cash flow
Cash spent on factories, equipment, acquisitions. Usually negative, and that is fine, it is building the future.
Financing cash flow
Cash from issuing shares or debt, or spent on dividends and buybacks. Shows who is funding whom.
Free cash flow
Operating cash minus the investment needed to keep running. The purest measure of what a business truly throws off.
What to read, in what order
Revenue and EPS vs estimates
The headline. Beat, meet, or miss sets the immediate tone.
Guidance
What management expects next quarter and year. Usually moves the stock more than the results.
Margins
Growing sales with shrinking margins can mean buying growth with discounts. Check both.
Cash flow and share count
Is cash following profit, and is the share count stable or quietly ballooning?
The call, not just the numbers
On the earnings call, listen for what management dodges. Evasive answers move stocks.
Listening to management, and between the lines
After the report drops, executives host a public earnings call: prepared remarks, then a Q&A with analysts. Anyone can listen live or read the transcript free on the company’s investor relations page. The numbers say what happened; the call says how management thinks.
Guidance specifics
Confident teams give numbers and reasons. Vague, hedge-everything guidance after years of precision is a tell.
The Q&A is the show
Prepared remarks are rehearsed. Watch which analyst questions get answered directly and which get talked around. Dodges move stocks.
One-time excuses, every time
Weather, currency, a tough comparison, a timing shift. Any one is plausible. A new excuse every quarter is a pattern wearing a costume.
Tone drift
Compare against last quarter’s call. A shift from "demand is strong" to "we are cautiously monitoring" is guidance in disguise.
Beat and raise
The healthiest rhythm: beat this quarter, raise the next forecast, repeatedly. Its breakdown often marks the top of a stock’s run.
Blaming shorts and doubters
Management attacking short sellers or analysts instead of answering them is historically a glowing red flag.
Connecting the report to the price tag
You have the earnings and the growth. The last step is the sanity check: what is a reasonable price for that combination? A rough old heuristic, popularized by Peter Lynch: a fair P/E is roughly the growth rate, with a floor around 10 for slow growers.
Set what the report told you, then judge the price
Numbers that whisper trouble
Revenue up, cash down
Sales grow but operating cash sinks. The growth may be on paper, or bought with terms customers will not honor.
Receivables outracing sales
Money owed by customers growing much faster than revenue can mean sales are being stuffed to look good.
Margins in steady decline
Each dollar of sales earning less, year after year, means the moat is draining.
Debt piling while profits stall
Borrowing to stand still. Interest costs then eat whatever profit remains.
Endless one-off items
"Adjusted" profits that always exclude bad news. Real companies have real costs every year.
Ballooning share count
Constant new shares dilute your slice. Your percent of the pie shrinks even if the pie grows.
Judging a fictional company in five minutes
Acme Robotics reports: revenue $10B, up 12%. Gross margin 55%, flat. Net income $1.4B, up 9%. Operating cash flow $1.8B. Debt modest, share count flat, guidance nudged higher.
The read: real growth, margins holding, cash exceeding profit (a good sign, the profit is real), no dilution, and a confident forecast. Nothing spectacular, everything healthy. Whether to buy then becomes purely a question of price: at a P/E of 18 that health is reasonably priced; at 60, years of perfection are already paid for.
Where to go deeper
The skills on this page are learnable from a handful of classics, and practiced free on real filings.
The Intelligent Investor · Benjamin Graham
The foundation: price versus value, margin of safety, and the market as a moody business partner.
One Up on Wall Street · Peter Lynch
A legendary fund manager on evaluating ordinary companies with common sense, and the P/E-vs-growth rule used above.
Financial Statements · Thomas Ittelson
The gentlest walkthrough of the three statements ever written for non-accountants.
Damodaran on valuation
Professor Aswath Damodaran of NYU publishes his full valuation courses and spreadsheets free online. The serious next step.