Financial statements continued

Are the company’s operations profitable?

Income statement

The income statement reports a company’s revenues and expenses and resulting net income or loss for a period of time.

If the company’s revenue exceeds its expenses, it will report net income; otherwise, it will report a net loss.

What is the company’s policy toward dividends and growth?

Retained earnings statement

How much of this year’s income did the company pay out in dividends to shareholders?

A company striving for rapid growth will pay a low (or no) dividend.

Does the company rely primarily on debt or stockholders’ equity to finance its assets?

Balance sheet

The balance sheet reports the company’s resources and claims to those resources. There are two types of claims: liabilities and stockholders’ equity.

Compare the amount of debt versus the amount of stockholders’ equity to determine whether the company relies more on creditors or owners for its financing.

Does the company generate sufficient cash from operations to fund its investing activities?

Statement of cash flows

The statement of cash flows shows the amount of cash provided or used by operating activities, investing activities, and financing activities.

Compare the amount of cash provided by operating activities with the amount of cash used by investing activities. Any deficiency in cash from operating activities must be made up with cash from financing activities.