ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Reading a Financial Statement - Part 1

Updated on April 11, 2015


You may think you need a Master's degree in finance when reading a financial statement, but it simply isn't true. Not every data point that is included is needed to understand good companies from bad ones. The data points that are the most needed are all that you should focus on. Other data points that are included will give more insight into a company but are not necessary to determine good companies that are candidates for your portfolio. This article will focus on the important data points and where you can find them.

Reading a Financial Statement

Current Market Conditions - Why Bother?

It could be argued that this is a lesson in futility based on the current market conditions and credit crisis. It may seem like not too many people are investing in stocks and there may be some truth to that. But these conditions will not last forever. There will be a time when people will seek out stocks again. Therefore, it's necessary to be ready for when that happens. When you learn about reading a financial statement you will be one step ahead of the game when that time comes.

Here are the most important factors when reading a financial statement:

Financial Statement Analysis Video

Earnings Per Share Trend

Reading a financial statement requires that you look to see if a company has a steadily rising earnings per share trend.  The earnings data point can be found in the income statement.  What you want to beware of is an erratic record of up/down earnings fluctuation historically.  Earnings per share is often the single most data item that the media focuses on and it leads to a price getting hammered (or even exploding).

Financial Statement Analysis on Amazon

P/E Ratio (Price/Earnings Ratio)

The P/E Ratio is computed by taking the price of the company's stock price (obtained from any financial website) and dividing it by it's earnings. The earnings are found on the income statement. It's important to grab the net income per share because the stock price represents the price of one share.

P/E has been rather controversial as a measure and should be taken in the context that it is intended. It gives a very quick snapshot of whether a company is overvalued or not. The number on its own means very little. You can have companies that have a P/E of 30 that are undervalued and companies with P/E ratios of 14 that are overvalued. You have to look at the industry that the company is in and what kind of growth rate a company is experience. It's also a good idea to look at past financial statements to see if there are trends. A solid company with an increasing P/E on a trend basis can be a good value.

Debt/Equity Ratio

Another important factor when reading a financial statement is to see how much debt a company has in relation to its overall equity.  It's calculated by taking the total liabilities divided by shareholder equity.   Both of these data points are contained in a company's balance sheet.  These numbers do not have to be adjusted for per share because they are both totals.  Again, this data point is relative to the company itself and to its industry.  A company could have a lot of debt but if they are able to put that debt to use to generate profits, the debt will not be problematic.  You must compare it historically and within the company's industry.

Cash and Cash Flow

If a company has no cash this could be a sign that they are in a big heap of trouble. Hopefully, the situation will correct itself on the next sales cycle. But if you see that a company is struggling to generate cash and keep it, this could be a warning sign. Even more importantly is the company should show a history of steady net cash flows. If not then they are relying on other forms to finance the business. This may be an okay situation in good times but during bad times, financing from debt can really take a company out.

Part 2 of this series will focus on the more subtle, qualitative aspects of reading a financial statement.

For detailed discussions on the subject of the stock market, head on over to Shareholder Helper and join in.


Submit a Comment

No comments yet.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)