How to read financial statements

Financial statements help analyze a company's performance and financial health. On TradingView, you can access all three core financial statements — income statement, balance sheet, and cash flow — directly from the company’s market page or by comparing multiple companies using the Stock Screener.

CONTENTS:

How to access financial statements
What are financial statements
What are GAAP and IFRS
Key accounting principles
Approaches to financial statement analysis

How to access financial statements

You can find financial statements in two different ways, depending on what you need for your analysis.

The first is to head straight to the Stock Screener. Once there, find the corresponding tabs and choose the one you need.

The second approach is to go to the market page of the company you want to analyze.

What are financial statements

Every publicly traded company is required to report its financial performance in three different statements.

Income statement

Contains information about the company's gains and losses, revenue, and expenditures over a specific accounting period, usually a quarter or a year — think Q1, Q2, Q3, and Q4.

An income statement tells investors how the company's realized net revenue gets transformed into net earnings and gives a clear picture of whether the business is profitable and can further finance its ongoing operations.

Depending on the regulatory requirements, business scope, and operating activities the format of this report may vary.

However, every income statement must include:

Total revenue: Represents the initial money value received by a company from its main operations
Cost of goods sold (COGS): Represents the amount of money a company spends to produce or manufacture the goods it sells
Operating expenses: Include selling, general & administrative expenses (SG&A), research and development (R&D), and depreciation
Operating income: Is calculated by subtracting COGS and operating expenses from total revenue
Income before interest and taxes (EBIT): Equals total revenue less cost of goods sold, SG&A and other operating expenses
Net income: Equals EBIT after deducting taxes
Earnings per share (EPS): EPS shows the company's earnings allocated to each outstanding share

Balance sheet

Shows what a company owns and owes. It provides investors with a quick review of a company's total assets, its total liabilities, and shareholders' equity at a specific point in time rather than for identifying long-term trends.

Fundamental analysts use balance sheets to calculate financial ratios such as dividends payable, net debt, and long-term investments.

The balance sheet formula is:

Assets = Total Liabilities + Shareholders' Equity

Cash flow statement

Shows a company's cash inflows and outflows. There are two methods for accounting for cash flows.

Accrual accounting involves recognizing incomes and expenses in the time period when a transaction occurs — not when payments are received

It is the standard method under the IFRS.

Accrual accounting is mandatory for large companies with revenue exceeding $25 million over the previous three years.

For example, on April 30 you pay for a new laptop with a bank card. Usually, such bank payments are processed 1-3 days later, and the seller will not receive the funds until the bank validates the transaction. However, even though the money is received in May, the seller will account for this payment in April.

On the contrary, when using the cash accounting method, the seller accounts for it in May — when the actual cash flows in.

This method provides a clearer picture of available cash and the actual assets the company has to finance its current operations.

It's mostly used by smaller businesses and it is much easier to implement.

What are GAAP and IFRS

Each statement is prepared in accordance with either the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

GAAP is a set of common rules and practices that companies are required to follow to ensure consistency and clarity in financial reporting. It is mandatory in the United States for both for-profit and non-for-profit organizations, as well as for government entities.

IFRS is more broadly accepted globally. It is mandatory for public companies in many jurisdictions and is recognized in more than 160 countries. This accounting standard aims to provide transparency and comparability worldwide.

Although both of these accounting frameworks share overlapping principles, they differ in approach.

GAAP is a rule-based system with less flexibility, but offers more detailed guidance.

IFRS, in contrast, is principle-based, providing broader guidelines.

Regardless of whether a company uses GAAP or IFRS, it must follow key accounting principles.

Key accounting principles

Accrual basis: Income is recognized at the time of the transaction. Companies that use accrual accounting must record revenue when it is earned, regardless of when the cash is received.

Going concern: Assumes the company intends to continue operations into the foreseeable future.

Consistency: Requires the application of the same accounting methods over time.

Materiality: Only information that is significant to stakeholders and could influence decision-making is included in financial reports.

Faithful representation: Information must be accurate, complete, and unbiased.

Comparability: Achieved when different companies follow the same accounting principles, allowing for meaningful comparisons.

Substance over form: Transactions should be recorded based on their economic reality, not just their legal format.

For example, if a parent company guarantees the liabilities of its subsidiary, those liabilities must be reported in the parent company's financial statements — even if the subsidiary is a separate legal entity.

Historical cost: Assets and liabilities should be recorded at their original cost, without adjustments for inflation.

Full disclosure: Requires businesses to disclose all relevant financial information to provide transparency and a complete view of the company's financial state.

Approaches to financial statement analysis

Financial statement analysis can be conducted using vertical, horizontal, and ratio analysis, applicable to all three financial statements.

Vertical and horizontal approaches help analysts understand the structure and trends in financial statements.

Ratio analysis involves comparing financial metrics to evaluate the company's performance and compare it with competitors.

Vertical analysis

Vertical analysis determines the percentage of each item listed on a financial statement relative to a base figure. For example, each item on the income statement is shown as a percentage of total revenue.

This results in "common size" statements and helps in assessing the internal structure of financial performance for a single financial period.

Horizontal analysis

Also known as trend analysis, horizontal analysis compares financial data over multiple periods to identify growth patterns or declines.

For instance, using the horizontal method on the cash flow statement can help investors understand how a company's cash generation has changed over time.

Ratio analysis

Ratios are relationships between financial metrics that help assess the overall health and performance of a company.

Key ratio categories include:

Profitability ratios: Measures how efficiently a company generates profit. For example, Return on assets (ROA) and Gross margin
Liquidity ratios: Indicates a company’s ability to meet short-term obligations. For example, Current ratio and Cash ratio
Leverage ratios: Shows how much a company relies on debt for its operations. For example, Debt-to-equity, and Interest coverage
Activity ratios: Reflects how effectively a company manages its resources. For example, Asset turnover and Days sales outstanding

The bottom line

The three main financial statements — income statement, cash flow statement, and balance sheet — contain key metrics about a company's financial stability, providing investors, creditors, government entities, and company management with key information to assess the business's financial health and its future prospects.