04 December 2022

All about reading a financial statement.

Many of us New Investors get overwhelmed by Financial Statements.

In today’s lesson, we’ll go over 6 important numbers to look at in a financial statement.

These 6 important numbers we must look at when analyzing a financial statement are:

  • Revenue
  • Gross Profit Margin
  • Cash vs Debt
  • Net Profit Margin
  • Price/Sales Ratio
  • Price/Earnings Ratio

Let’s dive into each of them⬇️

1. Revenue.

This is the income received by the company for the sales of goods or services that it provides. We are looking for companies that are growing their revenue.
When looking at revenue, we need to check 3 important things.
  • Make sure company revenue is increasing yearly.
  • Compare company revenue to other companies in the same industry.
  • Check if the company beats its own estimates.


2. Gross Profit Margin.

The Gross Profit Margin is the Profit the business makes before any deductions are made (salaries, marketing, legal costs, etc). We want to invest in businesses with high Gross Profit Margins. The higher the better.

When looking at Gross Profit, we need to do the following comparisons:

  • Compare the Gross Profit Margin year on year in a specific company (it is best if it is increasing)
  • Compare Gross Profits to other companies in the same industry

3. Net Profit Margin.

The Net Profit is what is left after all the deductions have been made. This determines whether or not the company made a profit or a loss. We are aiming to invest in profitable companies. However, there are times when we invest in companies that aren’t profitable (New companies that are spending money on growth). If these companies have a strong moat and other research points to a winner, we can ignore profitability. Continue to monitor these companies to determine whether they turn profitable when they say they will.

When looking at Net Profit, we want to make the following comparisons:

  • Determine if Net Profits are growing year on year.
  • Compare the Net Profit Margin to the rest of the industry.
4. Debt vs Cash.
I like to simplify this, I simply look at the debt levels and compare them to Cash and Equity. 
Cash – If the business has more cash than the debt it means it can pay its debt off immediately.
Equity – is the number of cash shareholders are putting in. We don’t want the company to receive more money from banks and borrowers than from us. A safe number is 50% of borrowers.5. Price to Sales Ratio (P/S)
Price is what you pay per share. This Ratio is essentially comparing the share price to the sales per share. It is calculated by taking the company’s market cap and dividing it by the company’s total revenue. Price to sales Ratios between 1 and 2 is considered good. A p/s Ratio of less than 1 is considered excellent.

The lower the p/s Ratio, the better. We generally compare the p/s Ratio to the industry or competitors, which will give you an idea if the company is overvalued.

6. Price to Earnings Ratio (P/E)

If company A has Profits of R200 for the year and you are paying R1000 for a share, the P/E Ratio is 5.
If company B has Profits of R100 for the year and you are paying R4000 for the share, the P/E is 40.

The lower the P/E Ratio the better.

So we will go with company A.

I prefer to go for companies with a P/E Ratio lower than the industry P/E Ratio. So I compare them all.
To get a hold of a company’s financial statement, I simply go on yahoo finance and search for the company, then click on “financials” However there are plenty of other sites that could help, feel free to suggest any in the comments.
Reposted with permission from @Younginvestor