Course
How to read financial statements, from the 10-K to the warning signs.
Ten short lessons. One made-up company. Each line of the income statement, the balance sheet and the cash flow statement, with every figure from one model.
EDUCATION, NOT ADVICE ·
The example company. Example Co. is a made-up company, the same one as in the valuation course. A model script calculates every figure, so you can check each one. The method works the same way on a real company.
Full disclosures →
How the course works
Every lesson uses Example Co., a made-up company. It is the company from the valuation course, with each line of its statements shown as a 10-K would show it.
A model script calculates every figure. It checks that the three statements tie, and that each total agrees with the valuation course.
The lessons
- The 10-K is where the numbers are. The annual report, the quarterly report and the four items to read first.
- The income statement shows how revenue becomes profit. Revenue, costs, the three margins and earnings per share.
- The balance sheet shows what the company owns and owes on one date. Assets, liabilities, equity and the current ratio.
- The cash flow statement shows where the cash went. Operating, investing and financing cash flows.
- Five links tie the three statements together. Five links, the statement of equity, and how to check them.
- Working capital is cash that waits inside the business. Receivables, inventory, payables and the cash cycle.
- Depreciation is old capex, spread over the years. Capital expenditure, depreciation and the useful life.
- Stock pay is a real cost, paid in shares. Stock pay, the share count and non-GAAP measures.
- Profit without cash is the first warning sign. Receivables, inventory, cash, capex and adjusted figures.
- Ten checks turn a 10-K into a short list of questions. Ten checks, the order to read, and the next step.
Example Co. on one page
| Measure | Example Co. |
|---|---|
| Revenue | $1,000 million |
| Gross margin | 45.0% |
| Operating margin | 18.0% |
| Net income | $137.5 million |
| Diluted EPS | $1.36 |
| Cash from operations | $185.1 million |
| Free cash flow | $105.1 million |
| Cash cycle | 63.7 days |
| Total assets | $760 million |
| Shareholders’ equity | $400 million |
After this course, take the valuation course. It turns the same statements into a value per share.
Also in the field guide: the valuation course, the
options course and the field guide entries
on P/E, free cash flow and working capital. Start here: lesson 1.
Sources
- Investor.gov, How to Read a 10-K/10-Q, for the items of the 10-K, the audited statements in Item 8 and the auditor’s report.
- SEC, Beginners’ Guide to Financial Statements, for the balance sheet equation, current items, the three sections of the cash flow statement and the statement of shareholders’ equity.