FINANCIAL
REPORTS

Financial statements can reveal crucial insights into a company’s health, performance, and future potential. This guide breaks down the three key financial reports — the income and cash flow statements, and the balance sheet, and provides practical steps for conducting your own financial analysis.

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By mastering the analysis of balance sheets, income statements, and cash flow statements, investors can spot opportunities, identify risks, and make more confident trading decisions. These are the key metrics to watch, where to find them, and how to use them.

What Are the Three Financial Reports?

The three most important financial reports are the balance sheet, income statement, and cash flow statement.

Each serves a distinct purpose and combined they provide a comprehensive view of a company’s financial position and performance.

Balance Sheets

A balance sheet is a snapshot of a company’s financial position at a specific point in time.

It follows the fundamental equation: Assets = Liabilities + Equity. This statement reveals what resources a company controls, what it owes to creditors, and what remains for shareholders.

The balance sheet helps investors assess whether a company can meet its short-term obligations and fund future growth. For instance, comparing current assets to current liabilities indicates whether a firm can pay its bills over the next 12 months.

Income Statements

The income statement, also called the profit and loss statement, shows how much money a company earned and spent over a specific period.

Starting with revenue at the top, it subtracts various costs—cost of goods sold, operating expenses, interest, and taxes—to arrive at net profit.

This statement reveals profitability trends and helps investors understand whether a company’s core business generates sustainable profits. Gross margin (gross profit divided by revenue) and net margin (net profit divided by revenue) are crucial metrics derived from this statement.

Cash Flow Statements

Cash flow statements track the actual movement of money in and out of a business, divided into three categories: operating activities, investing activities, and financing activities.

Unlike the income statement, which includes non-cash items like depreciation, this report shows real cash generation.

Operating cash flow is particularly important as it indicates whether a company’s primary business activities generate sufficient cash to sustain operations without external funding.

Key Metrics and Ratios to Focus On

Financial ratios transform raw numbers into meaningful insights. Here are essential metrics every investor should understand:

Metric	Formula	What It Tells You	Healthy Range (Industry and model dependant)
Current Ratio	Current Assets ÷ Current Liabilities	Short-term liquidity	1.5–3.0 Varies by industry
Debt-to-Equity	Total Debt ÷ Total Equity	Financial leverage	< 2.0 The lower the better Varies by industry
Gross Margin	(Revenue – COGS) ÷ Revenue × 100	Pricing power & efficiency	Varies by industry 20–40% in manufacturing 60–80% in tech
Return on Equity (ROE)	Net Income ÷ Shareholder Equity × 100	Profitability vs investment	> 15% The higher the better Varies by industry
Free Cash Flow	Operating Cash Flow – CapEx	Cash available for growth	Positive & growing

These ratios help compare companies within the same industry and track performance over time. A declining gross margin might signal increasing competition, while improving ROE suggests management is creating more value from shareholders’ investments.

It is important to ensure that any comparisons are appropriate as business models differ across different sectors. Ranges vary materially by sector, capital intensity, and business model meaning that what is a “good” or “bad” number for healthcare stocks might not be considered the same way if applied to tech sector stocks.

How To Analyse Financial Reports

Here is one approach you could adopt when analysing financial statements:

• Step 1: Start with the income statement — Review revenue growth trends over the past four quarters. Is the company growing? Calculate gross and net margins to assess profitability. Compare these margins to industry averages.
• Step 2: Examine the balance sheet — Check the current ratio to ensure short-term liquidity. Evaluate debt levels using the debt-to-equity ratio. Look for changes in working capital that might indicate operational issues.
• Step 3: Analyse cash flow — Verify that operating cash flow is positive and ideally growing. Compare operating cash flow to net income—if cash flow is consistently lower, the company might be using aggressive accounting. Calculate free cash flow to assess funds available for dividends or growth investments.
• Step 4: Compare across periods — Look at year-over-year and sequential quarterly changes. Identify trends in key metrics. Watch for sudden changes that might signal problems or opportunities.
• Step 5: Consider the context — Review management commentary and notes to the accounts. Consider industry conditions and economic factors. Check for one-off items that distort results.

Worked Example: Analysing a UK Company

Let’s analyse a hypothetical UK retailer’s Q2 2025 results compared to Q1 2025:

Income Statement Highlights:

• Revenue: £120 million (Q2) vs £115 million (Q1) = 4.3% growth
• Gross Profit: £48 million (Q2) vs £47.2 million (Q1)
• Net Income: £8.4 million (Q2) vs £8.1 million (Q1)

Key Ratios Calculated:

• Gross Margin: 40% (Q2) vs 41% (Q1) — slight compression
• Net Margin: 7% (Q2) vs 7% (Q1) — stable
• Current Ratio: 1.8 (Q2) vs 1.6 (Q1) — improving liquidity

Cash Flow Analysis:

• Operating Cash Flow: £12 million (Q2) vs £9 million (Q1)
• Free Cash Flow: £8 million (Q2) vs £5 million (Q1)

Interpretation:

• The company shows healthy revenue growth and improving cash generation.
• The slight gross margin compression might indicate pricing pressure.
• Strong cash flow suggests efficient operations.
• The improving current ratio indicates better working capital management.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

Where to Find Financial Statements

The financial statements produced by listed companies can be found through various channels but the “golden source” of information is the Investor Relations section of a company’s website. There you’ll find comprehensive annual reports and interim statements.

• US-listed companies publish annual reports (Form-10k) within 60-90 days of year end depending on their size, and quarterly reports (Form-10Q) within 40-45 days of their fiscal quarter’s end.
• Also monitor trading updates. These can be released on an ad hoc basis but may provide insightful information.
• Specific deadlines vary depending on the jurisdiction and the company’s size or filing status.
• The reports will typically be compiled following GAAP or IFRS accounting standards, with there sometimes being regional differences regarding which approach is adopted.
• Many companies also host earnings calls where management discusses results and answers analyst questions.

Additional resources include EDGAR (Electronic Data Gathering, Analysis, and Retrieval system) in the US, the London Stock Exchange’s RNS (Regulatory News Service), financial data providers like Bloomberg or Refinitiv, and broker research platforms.

Why Quarterly Reports Matter

Quarterly reports released during “earnings season” matter because they provide regular snapshots of company performance, enabling investors to track progress and spot trends early.

• These reports reveal whether management is executing its strategy successfully.
• Earnings surprises, where results significantly exceed or fall short of analyst consensus, can trigger substantial share price movements.
• Understanding why a company beat or missed expectations—through revenue growth, margin expansion, or cost control—provides insights into future performance.  
• Sequential quarterly comparisons help identify momentum changes, whilst year-over-year comparisons eliminate seasonal effects.

Risks and Limitations

Quarterly, annual and interim reports have important limitations investors must understand. These are some of the factors to keep in mind when considering how to read financial statements:

• Historical nature: Reports show past performance, not future potential
• Accounting choices: Different depreciation methods or revenue recognition policies can affect comparability
• Non-cash items: Profits can include paper gains whilst cash flow remains weak
• One-off events: Restructuring charges or asset sales can distort trends
• Currency effects: For international companies, exchange rate movements impact reported results
• Manipulation risk: Aggressive accounting can temporarily inflate results

Always scrutinise the notes to account for details about accounting policies, contingent liabilities, and subsequent events. Be particularly wary of companies with consistently higher profits than operating cash flow, frequent restatements, or qualified audit opinions.

Final thoughts

Mastering the three financial statements—balance sheet, income statement, and cash flow—can help you unlock insights that drive smarter investment decisions.

But also consider what isn’t there. Does a company for example provide limited information on development and expansion plans, suggesting its business model may be reaching capacity.

Visit the eToro Academy to learn more forms of investment analysis.

Frequently Asked Questions

What is free cash flow vs operating cash flow?

Operating cash flow represents cash generated from core business activities, whilst free cash flow subtracts capital expenditures needed to maintain or grow the business. Free cash flow shows what’s available for dividends, debt repayment, or acquisitions.

How do companies restate financials?

Companies restate financials when they discover errors, change accounting policies, or complete acquisitions requiring retrospective adjustment. Restatements appear in subsequent reports with explanations in the notes.

What are non-recurring items and why must I adjust for them?

Non-recurring items include restructuring costs, litigation settlements, or gains from asset sales. Adjusting for these provides a clearer view of ongoing operational performance, helps predict future results and carry out more advanced valuations.

How do accounting standards differ between regions?

Listed UK companies must use IFRS accounting standards, while the SEC stipulates that US companies follow US GAAP. Key differences include inventory valuation methods, development cost capitalisation, and goodwill treatment. Always note which standards a company follows when making comparisons.

Why do some companies report negative cash flow but positive net income?

This occurs when profits include non-cash items like depreciation or when companies extend customer payment terms. Companies experiencing rapid growth might also invest heavily in inventory or fixed assets, reducing cash despite profitable operations.