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There are three main statements that financial analysis evaluates.

The Balance Sheet

The first is the Balance Sheet. This is a snapshot of a company’s financial position. It consists of assets, liabilities, and shareholders’ equity. Liabilities and shareholders’ equity represent the sources of a company’s funding. Liabilities are external resources that the company uses temporarily and will eventually need to repay. Shareholders’ equity represents the capital that the company fully owns. And assets are all the ways the company invests money. The key rule is that Assets must equal Liabilities plus Shareholders’ Equity.

The Income Statement

The Income Statement, on the other hand, shows a company’s performance over time. It reports profits and losses, breaks down main types of expenses, and its vertical structure helps identify strengths and weaknesses in the company’s business model. Often, it is the most important statement to consider, because even a quick glance can tell you whether the company might be an interesting investment or not.

The Cash Flow Statement

The Cash Flow Statement is the last of the trio. This document helps you track the actual movement of money. Sometimes a company can be profitable on paper but still run out of cash due to large outflows. The Cash Flow Statement helps uncover these issues and gives insight into what needs to be adjusted to solve the problem.

Wrap-up

Together, these three statements are considered the most important in financial analysis. They show both the current financial position and the reasons behind it.