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Read the Numbers, Understand the Business
A Practical Introduction to Company Financial Statements
An approachable, practical guide to reading financial statements, interpreting cash flow, assessing business quality, and asking better valuation questions.
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Chapters
- 01Begin with the business, not the share priceBuying a share means buying a small ownership interest in a business. Before looking at its price chart, ask what that business does, why customers buy from it, and whether it can continue earning…
- 02The three statements tell one storyA company's annual report usually contains three main financial statements. They are not three separate mysteries: each describes a different part of the same business.
- 03Read profitability without being misledProfit margins help you understand how much of each sales dollar survives different categories of costs.
- 04Follow the cash and the cost of staying competitiveProfit is an accounting measurement. Cash is what pays suppliers, staff, lenders and shareholders. A good financial review needs both.
- 05Check the balance sheet for hidden pressureA business can be highly profitable yet vulnerable if it must refinance debt during a downturn or cannot convert its assets into cash when bills fall due.
- 06Measure returns, not just growthA company can grow sales without improving the value of the business. It may need so much additional capital to produce each dollar of growth that the benefit to owners is limited.
- 07Connect business quality with the price paidEven a strong company can be a poor investment if its shares are purchased at an unrealistic price. Business quality and valuation are different questions, and both matter.
- 08A practical 30-minute company reviewThe purpose of a fast-reading guide is practical understanding. Here is a repeatable first-pass review you can carry out with an annual report and a spreadsheet.