Business Knowledge

Financial Statement Analysis

Financial Detective: Your Quick Check

Don’t just look at revenue. Dig deeper into these key areas.

1. Is it Profitable? (Income Statement)

  • Gross Margin: Gross Profit / Revenue. Is the core product/service profitable?
  • Net Margin: Net Income / Revenue. What’s the bottom line after ALL costs?
  • Red Flag: Declining margins over time.

2. Can it Pay its Bills? (Balance Sheet & Cash Flow)

  • Current Ratio: Current Assets / Current Liabilities. Can it cover short-term debts? (Aim for 1.5-2.0+)
  • Operating Cash Flow: Is the business generating enough cash from its core activities?
  • Red Flag: Current Ratio below 1.0, negative operating cash flow.

3. Is it Too Risky? (Balance Sheet)

  • Debt-to-Equity Ratio: Total Debt / Total Equity. Is it heavily reliant on debt?
  • Red Flag: High debt, especially if earnings are volatile.

4. Is it Efficient? (Efficiency Ratios)

  • Inventory Turnover: COGS / Average Inventory. Is inventory selling quickly?
  • Receivables Turnover: Revenue / Average Accounts Receivable. Are customers paying on time?
  • Red Flag: Slowing inventory or receivables turnover.

Golden Rule: Look at trends over time, not just single numbers. Compare to industry peers. And remember: Cash is King!