Learn · 6 min
Read an annual report in 10 minutes
The three financial statements, what to look at first and the classic traps.
Three statements, three questions
The income statement answers "does the company make money?". The balance sheet answers "what does it own and what does it owe?". The cash flow statement answers "is cash actually coming in?".
All three are linked: net income flows into equity on the balance sheet, and the cash flow statement explains why cash on the balance sheet changed.
Where to start
Look first at the trend over several years rather than one year: revenue, operating margin, free cash flow and net debt. A trend says more than a single figure.
Then read the notes on debt (maturities, rates) and the "risk factors" section: that is where the company describes what could go wrong.
Classic traps
Rising profit with falling cash is a warning sign: sales may be paid late, or inventories are building up. "One-off" items that come back every year are not really one-off.