Reading a Company's Financial Statements: The Three That Matter

The ratios on a stock page — P/E, ROE, EPS — don't come from nowhere. They are squeezed out of three documents every listed company must publish: the income statement, the balance sheet, and the cash flow statement. You don't need an accounting degree to read them usefully. You need to know what each one is for and a handful of lines to look at. This guide gives you both.

If you haven't yet, read the basics of fundamental analysis first — this guide shows you where those ratios actually come from.

The income statement: did the company make money?

The income statement (sometimes called the profit-and-loss, or "P&L") covers a period of time — a quarter or a year — and answers one question: did the business earn a profit? It reads top to bottom like a funnel:

• Revenue (or "sales", "turnover") — all the money that came in from doing business. The top line.
• minus the cost of goods/services and operating expenses — what it cost to produce and run the business.
• = operating income — profit from the core business before financing and tax.
• minus interest (on debt) and taxes.
• = net income — the bottom line. The actual profit that belongs to shareholders.

What to look for: is revenue growing year over year? Is net income growing with it, or are costs eating the gains? A company whose sales rise while profits stall is working harder for less. Net income, divided by the share count, is the EPS you see on the stock page.

The balance sheet: what does the company own and owe?

The balance sheet is a snapshot at a single moment — what the company owns and owes on a specific date. It always obeys one equation:

Assets = Liabilities + Equity

In plain terms: everything the company owns (assets) was paid for either with borrowed money (liabilities) or with the owners' money (equity).

• Assets — cash, inventory, buildings, equipment, money owed to the company.
• Liabilities — debt, money the company owes to suppliers, lenders, and others.
• Equity — what's left for shareholders after subtracting liabilities from assets. This is the book value, and divided by the share count it gives the book value per share behind the P/B ratio.

What to look for: how much debt? Compare total liabilities to equity. A company drowning in debt is fragile — a bad year or a rate rise can tip it over. Some debt is normal and even healthy; a lot, especially relative to equity, is a risk flag. For banks and property firms the balance sheet is the business, which is why P/B matters most for them.

Net income (from the income statement) divided by equity (from the balance sheet) gives you ROE — how well management turns owners' money into profit.

The cash flow statement: is the profit real?

Here is a subtlety that separates careful investors from the rest: profit is an opinion; cash is a fact. Accounting rules let a company book revenue before the cash actually arrives, and various non-cash charges can distort net income. The cash flow statement strips that away and shows the actual money moving in and out, split into three buckets:

• Operating cash flow — cash generated by the core business. This is the one that matters most. A healthy company's operating cash flow should, over time, roughly track or exceed its reported net income.
• Investing cash flow — cash spent on (or raised from) long-term assets, like building factories or buying equipment.
• Financing cash flow — cash from raising debt or issuing shares, and cash paid out as dividends or to repay loans.

What to look for: is operating cash flow positive and consistent? A company that reports rising profits but bleeds cash from operations deserves suspicion — the "profit" may be accounting, not money. Strong, steady operating cash flow is what ultimately pays your dividends and funds the company's growth.

How they connect

Read together, the three tell one story:

• The income statement says whether the business is profitable.
• The balance sheet says whether it's financially sound or fragile.
• The cash flow statement says whether the profit is backed by real money.

A business that is profitable, lightly indebted, and generating solid operating cash year after year is the kind worth owning. One that looks profitable on paper but carries heavy debt and weak cash flow is the kind that surprises people badly.

Where to find them

Philippine listed companies file their financial statements and quarterly reports on PSE EDGE, the exchange's official disclosure portal, and on their own investor-relations pages. Each company's stock page on this site surfaces the key figures and links to its latest disclosures — a faster starting point than reading a 100-page annual report cold.

One honest caveat

Not every figure is always available for every Philippine company, and on this site a missing number shows as a dash rather than a fabricated value. A blank is an unknown, not a zero — read around it, and never let a tidy-looking number you can't trace fool you.

Where to go from here

Now that you know where the numbers come from, revisit fundamental analysis basics to turn them into judgments, and understanding dividends to see how cash flow becomes income in your pocket. Then open a company you know on the stock pages and trace the figures back to these three statements.

This article is educational and is not investment advice.