Reading Financial Statements — Income, Balance Sheet, Cash Flow

The three financial statements — Income Statement, Balance Sheet, and Cash Flow Statement — are the foundation of fundamental analysis. Together, they tell the complete story of a company's financial health. The income statement shows profitability, the balance sheet shows financial position, and the cash flow statement shows actual cash generation. Understanding all three is essential for any serious stock investor.

The Income Statement (also called Profit & Loss or P&L) shows revenues, expenses, and profits over a period (quarterly or annually). Key lines: Revenue (total sales), Cost of Goods Sold (COGS, direct costs), Gross Profit (Revenue - COGS), Operating Expenses (SG&A, R&D, depreciation), Operating Income (EBIT), Interest Expense, Tax Expense, and Net Income (the "bottom line"). Gross margin = Gross Profit / Revenue tells you production efficiency. Operating margin = Operating Income / Revenue tells you business efficiency. Net margin = Net Income / Revenue is the overall profitability.

The Balance Sheet is a snapshot of what a company owns (assets), owes (liabilities), and the residual value belonging to shareholders (equity) at a specific date. The fundamental equation: Assets = Liabilities + Equity. Current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt) determine working capital and short-term liquidity. Non-current assets (property, equipment, intangibles) and long-term debt show the company's investment base and leverage.

Key balance sheet ratios: Current Ratio = Current Assets / Current Liabilities (above 1.5 is healthy). Quick Ratio = (Current Assets - Inventory) / Current Liabilities (stricter test). Debt-to-Equity = Total Debt / Total Equity (lower is generally safer). Book Value per Share = Total Equity / Shares Outstanding. Price-to-Book = Stock Price / Book Value per Share — a P/B below 1 means the stock trades below its accounting value.

The Cash Flow Statement tracks actual cash movements in three sections. Operating Cash Flow: cash generated from the core business (starts with net income, adjusts for non-cash items like depreciation, and changes in working capital). Investing Cash Flow: cash spent on or received from investments (capital expenditures, acquisitions, asset sales). Financing Cash Flow: cash from or to capital providers (debt issuance/repayment, equity issuance, dividends). Free Cash Flow = Operating Cash Flow - Capital Expenditures.

Red flags to watch for: (1) Revenue growing but operating cash flow declining — the company may have collection problems. (2) Net income significantly higher than operating cash flow — earnings may be inflated by accounting tricks. (3) Inventory growing faster than revenue — potential demand problem. (4) Receivables growing faster than revenue — customers are taking longer to pay. (5) Increasing debt with declining profitability. (6) Negative free cash flow for multiple consecutive years.

Analyzing Egyptian companies: On the EGX, financial statements are published quarterly and available through the Egyptian Exchange website and disclosure platforms. Key considerations: (1) Check for consistency between quarters. (2) Compare metrics against sector peers. (3) Pay attention to currency exposure for import-dependent companies. (4) Government subsidiaries may have unique revenue patterns. (5) Look at the notes to financial statements for related-party transactions. (6) FoudaLens pulls fundamental data to calculate key ratios automatically. This is not financial advice.