Fundamental Analysis

Deconstructing Financial Statements

Read the numbers like an analyst — parse income statements, balance sheets, and cash-flow statements with precision, and spot the gap between reported earnings and real cash.

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StartLesson 1 · From Reader to Analyst

What you’ll leave with12 lessons · 12-line playbook

Before I trust a number, I ask three things: compared to what, where's the cash, and is it real?
Before I trust any single statement, I check that it ties to the other two — net income into retained earnings, ending cash to the balance sheet, capex into PP&E.
When net income and operating cash diverge, I follow the working-capital and non-cash lines to find out why before I trust the earnings.
Before I trust a profit, I check two things: did the revenue turn into cash, and is the operating number clean of one-offs? I compare and value on the recurring figure, never the headline.
I read every balance sheet in two columns — operating business vs financing — net the cash against debt, and check how much of the asset base was bought (goodwill) rather than built.
I measure working capital in days — DSO, DIO, DPO — and watch the cash conversion cycle: a shrinking or negative cycle frees cash, a rising one traps it even as profit grows.
I value on free cash flow, not reported earnings: FCF = CFO − capex. I add after-tax interest for FCFF (the whole firm) or net borrowing for FCFE (the equity), and pick the measure to match the question.
When margins jump, I ask whether costs were capitalized rather than expensed: capitalizing flatters EBIT but balloons capex and leaves free cash flow flat. I strip the capitalized line to see the real margin.
I never stop at the consolidated line. I open the segment note to see where revenue comes from, where profit comes from, each segment's margin, and how concentrated the business is by geography — because a blended number hides a weak segment.
To normalize earnings I separate operating from non-operating: I strip one-off items and non-operating tailwinds like pension credits, keep recurring real costs (stock comp, interest, depreciation), and check whether EPS grew because the business did or just because the share count shrank.
I restate the statements as percentages — costs as a share of revenue, assets as a share of the total — and I track those ratios across years, because a margin quietly drifting down tells me where a business is heading long before the dollar totals do.
I run every filing through the same pipeline: is the revenue real, does profit turn into cash, what's the normalized operating number, how much free cash is left, and is EPS real or just fewer shares — then I name the exact line behind my verdict.

Deconstructing Financial Statements

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