Public companies are required by law to publish these statements each month, quarter and year. In the US, this is the famous 10-Q. In the EU it’s the infamous IFRS. And in Australia, the 388. And they’re all in the public domain, so that we can quite easily discover how a company is MAKING its money and how it’s SPENDING it. Now remember – these reports are prepared by accountants who WORK for the firm, and sometimes the numbers may be a bit flubbed. But they’re the best we have to go on, and they DO give us a good picture of a company’s condition, nevertheless.

Basically, there are 3 types of statements we should be looking at – the balance-sheet, the income statement and the cash-flow report. Let’s start with our balance sheet: this is the net worth of the company – its assets and liabilities. Assets include real estate, equipment and intangibles, like patents and trademarks. To that we add owner’s equity, which is accumulated earnings and shareholder’s capital. Liabilities include debt, leases, salaries, equipment depreciation and so forth. One important component is shareholder EQUITY – what the company would be worth if it were liquidated – how much shareholders would get after paying creditors. In short, the balance sheet is a kind of snapshot of a momentary situation.

But take your time. Just because it’s a snapshot doesn’t mean you should simply GLANCE at it. Read the assets. See if they make sense. Use your imagination and pretend you’re the business owner. Would YOU have bought that downtown block of land just to let it stand idle? Was that widget dispenser really necessary, or could the CEO have shares in the company producing it? Look carefully at the liabilities. Are vendors being paid on time? What liabilities are long-term and what are short-term? Are short-term expenses smothering the piggy bank? And finally make sure that the sum of assets equals the sum of liabilities. Otherwise you have a non-balanced balance sheet, and that’s just sloppy.

The income statement is both important and potentially hazardous. Simply put, it’s how much money the company generated over a certain period – all earnings and other income versus all expenses and losses. The two main items here are revenue – the actual gross income – and profit after taxes, which explains how much of that revenue remains after expenses. The profit margin is one divided by the other. In between, though, we DO have an itemization of expenses. Again, under revenues we’ll see ALL income – sales, interest on assets and so forth. Operating expenses will include salaries, depreciation of furniture, machinery – anything the company owns. Again, use your imagination. Is an entire inhouse publicity department justified? Would it be cheaper to outsource? Does the depreciation make sense? Is that how much you’d lose on YOUR car over a single year or is someone flubbing the numbers?

The cash flow statement is sometimes referred to as the Profit & Loss statement. It includes operating expenses, investments and other financing activities. Once again – many of the items appear in the two other reports, but the cash flow statements provides a more in-depth analysis of how the company is moving its money around. It’s usually divided into operating activities, investment activities and financing activities. Again, is the company sending enough to research and development or is there a chance they’ll soon become irrelevant? Does the CEO’s salary make sense? How did the company pay back its loans? By taking out a worse one? Is the company solvent? Can it pay its debts or are we in trouble? Are there any strange expenses? To many insurance claims? To many plumbing bills? And, most important, how is the company generating its cash? From sales or loans? You need them both, but over-lending spells trouble.

You’ll often see a fourth report, which is the shareholder’s equity. It’s mainly based on the company’s equity and includes retained earnings, value of shares and so forth.

Finally, take a look at that ever-reported EPS – earnings-per-share, because there’s more here than a driver of share value. How much bottom-line profit is making its way to shareholders. Simply divide the net income – that’s after-tax profit from the income statement, by how many outstanding shares there are in the market. You’ll find that in the balance sheet under capital stocks. Now, just because net income increased by a certain percent doesn’t mean that EPS should, as well. If it’s less, check if more shares were issued during the year – public OR private. If its more, was there a buyback? That would imply an artificial increase in EPS.

Now, remember. These statements are prepared by professional money-people. But that doesn’t mean you have to be one to read them. On the contrary – they’re prepared for shareholders and other creditors, and if someone’s making them decipherable, there must be a reason. Look for another asset. Financial reporting is a legal requirement, and its enforced by law – just like jaywalking. Still, they ARE a lot of work; but you probably worked just as hard to MAKE your money. Don’t be lazy when you SPEND it.