How to Read Financial Statements for Beginner Investors

Financial statements are important documents that show a company's financial condition, and they are indicators that contain key information for making investment decisions about a company.
Let's go through the contents of financial statements by dividing them as follows.

■ Income statement
This is an indicator that records revenue and expenses to show net income.
The important items are revenue, cost of sales, net income and profit margin.
Just because revenue increases does not necessarily mean the company is growing. That is why it is important to analyze the income statement properly.
For example, if revenue increased but the increase came from higher cost of sales, it means costs have gone up a lot, so it cannot be seen as good news.
Next are net income and profit margin. A company whose net income increases steadily is showing that it is growing.
In particular, a high profit margin means relatively high net income even without selling a lot, which is very good for a company.
In the actual stock market, an increase in profit margin is often taken as better news than an increase in profit.
If you are aiming for ten-bagger stocks, keep a steady eye on the company's profit margin.

■ Balance sheet
An indicator that shows the state of assets, liabilities and equity at a glance.
Assets include current assets and non-current assets, and of these, current assets are assets that can be converted to cash within one year.
A high current ratio means there are many of these current assets, and indicates that the company can repay its debts without any problem.
Conversely, liabilities are debts the company must repay, and of these, liabilities that must be repaid within one year are called current liabilities.
Having many current liabilities means there are many debts to repay in the short term.
If current liabilities exceed current assets, the company is potentially exposed to a liquidity crisis.

■ Cash flow statement
Unlike the income statement, the cash flow statement shows actual cash flow, not the profit recorded in the accounting books.
Cash flow can be divided into operating activities, investing activities and financing activities.
Cash flow from operating activities is the cash that comes in from the company's normal business activities.
It is recorded when actual cash is received, not on credit.
Cash flow from investing activities mainly refers to cash that comes in through the disposal of non-current assets.
Finally, cash flow from financing activities refers to cash coming in and going out through activities such as issuing new shares (paid-in capital increases) and paying dividends.
Cash coming into the company is of course a good sign, but in flows such as investing or financing activities, the incoming cash does not necessarily carry a positive meaning, so it cannot always be called good.
When analyzing the cash flow statement, for flows from investing and financing activities, you need to also check the reasons the cash is moving by referring to the company's disclosures.