Financial statements & useful ratios

The income statement reports revenue and expenses over a period, ending in net income under accounting rules. The balance sheet is a snapshot of assets, liabilities, and equity. The cash-flow statement reconciles cash from operating, investing, and financing activities. Read them together: a fast-growing company can report earnings while consuming cash; a one-time asset sale can temporarily boost cash flow.

Revenue growth is not automatically healthy growth. Check gross and operating margins, customer retention where disclosed, segment profitability, stock-based compensation, share count, debt, and whether capital spending supports future operations. Free cash flow is commonly approximated as operating cash flow less capital expenditures, but definitions vary and the label is not standardized universally.

Price-to-earnings (P/E) relates share price to earnings per share; it can be misleading when earnings are negative, unusually high / low, cyclical, or affected by accounting. Enterprise value to EBITDA compares a capital-structure-aware value measure with earnings before interest, tax, depreciation, and amortization, but excludes real costs such as capital spending and can be unsuitable for some industries.

Return on equity, return on invested capital, debt-to-equity, interest coverage, and operating margin can suggest useful questions. Compare businesses in a similar sector and over a full cycle, understand whether measures are trailing or forecast, and check how goodwill, leases, buybacks, and acquisitions affect them. A cheap-looking multiple may reflect declining economics or hidden risk.

Earnings per share can rise or fall differently from total company earnings because the number of shares changes. Stock compensation can dilute owners; buybacks may reduce shares but are not automatically value-creating if done at an excessive price or financed imprudently. Read diluted weighted-average shares and the equity footnotes, not just the buyback headline.