4. Fundamentals and earnings

The statements and the ratios

Three tables that describe a company, and the ratios built on them.

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  • 5 lessons
  • 27 min
About this section

Three tables describe every company (what it earned, what it owns and owes, where its cash went), and a handful of ratios turn them into comparable numbers.

What you will be able to do

  • Read an income statement, a balance sheet and a cash flow statement in FA.
  • Compute margins, ROE, P/E, EV/EBITDA and FCF yield, and know when each misleads.
  • Use DIAG to list red flags, green flags and items to watch, with evidence.
  • Split revenue by segment (SEG) and track a company's operating numbers (KPIS).
  • Ask what growth today's price assumes (RDCF).

Five words to know

income statement
revenue minus costs over a period: did the company make money?
balance sheet
what the company owns and owes on one date
cash flow statement
where cash came from and went during a period
margin
a profit as a percentage of revenue
ratio
one number divided by another, to compare companies of different sizes
  1. 01The three financial statements (FA)Every company reports three tables (the income statement, the balance sheet and the cash flow statement), and FA shows all three by year or quarter.5 min
  2. 02Ratios that matter (FA ratio tabs)A ratio divides one number by another so companies of any size can be compared: margins and returns for quality, debt ratios for risk, and valuation multiples for price.6 min
  3. 03Red and green flags (DIAG)DIAG turns a company's filings and numbers into a short verdict and lists of red flags, green flags and items to watch, each with the fact, a reading and its source filing.5 min
  4. 04Revenue by segment and company KPIs (SEG, KPIS)SEG splits a company's revenue by product, segment and region from its filings, and KPIS tracks the operating numbers it reports beyond the statements, each with its source quote.5 min
  5. 05What growth is priced in? (RDCF)RDCF runs a discounted cash flow model backwards, finding the yearly growth today's value assumes and setting it next to the growth the company actually delivered.5 min

Educational material about reading market data, not investment advice.