Learn · Chapter 01 of 09
Financial statements
Every number in fundamental analysis comes from three statements: what the company earned (P&L), what it owns and owes (balance sheet), and what cash actually moved (cash flow). This chapter teaches you to read all three together — because any one of them alone can mislead.
Start here · 4 lessons · 14 min read
Key takeaways
- P&L shows performance, balance sheet shows position, cash flow shows truth — read all three.
- Five-year trends matter more than any single quarter.
- Other income and one-offs must be stripped before judging the business.
Lesson 1
Profit & loss: revenue to PAT
- Follow the waterfall: revenue → operating profit (EBITDA) → PBT → PAT. Margins at each step reveal pricing power vs cost control.
- Separate operating profit from other income — a company living off treasury gains is not operationally strong.
- Check 5-year sales and profit growth on Screener-style tables before any ratio; trends beat snapshots.
Lesson 2
Balance sheet: what it owns, what it owes
- Assets = equity + liabilities, always. Equity growing via retained profits is the healthiest funding source.
- Watch borrowings vs net worth: debt/equity above ~1 needs a justification (infra, utilities) or a pass.
- Reserves growing year after year means profits were real enough to retain — cross-check with cash flow.
Lesson 3
Cash flow: where profit meets reality
- Operating cash flow should track PAT over 3–5 years. Persistent gaps mean profits stuck in receivables or inventory.
- Investing outflows are fine when they build capacity; financing inflows covering operating shortfalls are not.
- Free cash flow (operating cash minus capex) is what can actually pay dividends, buybacks or debt.
Lesson 4
Reading all three together
- Profit without cash is an opinion; cash without profit growth is a melting ice cube. Demand both.
- Start every analysis with 5-year sales, operating margin, PAT and operating cash flow — four lines, two minutes.
- Annual reports (management discussion + auditor notes) explain the numbers; never skip them for mid- and small-caps.
Mistakes that cost money
- Buying on a single quarter's PAT jump without checking cash flow.
- Ignoring the balance sheet while profits look good (debt builds quietly).
- Treating other income as operating strength.
Chapter FAQ
Where do I find financial statements of Indian companies?
Company annual reports (investor relations pages), exchange filings on NSE/BSE, and free screeners that compile 5–10 year P&L, balance sheet and cash-flow tables in one view.
PAT vs operating cash flow — which matters more?
Both, together. PAT measures accounting performance; operating cash flow measures cash reality. Over 3–5 years they should broadly agree — sustained divergence is a red flag, not a bargain.
How much accounting do I need to start?
Very little: revenue, margins, PAT, debt/equity, operating cash flow and FCF. This chapter's four-line screen covers 80% of initial filtering.
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