Reading Financial Statements for Non-Experts

The Three Statements That Matter

Every public company files three financial statements. You don't need to understand every line — just the key numbers that reveal health or danger.

1. Income Statement (P&L)

This shows revenue, expenses, and profit over a period (quarterly or annually).

Key numbers to check:

• Revenue trend: Is it growing or shrinking? Consistent growth is good. Declining revenue is a warning.
• Net income: Is the company actually profitable? Many hyped stocks have never made a penny.
• Operating expenses vs revenue: If the company spends $2 for every $1 it makes, it's burning cash.

2. Balance Sheet

This is a snapshot of what the company owns (assets) vs what it owes (liabilities).

Key numbers to check:

• Cash and equivalents: How many months of operations can they fund? Less than 6 months of runway is concerning.
• Total debt vs total equity: A debt-to-equity ratio above 2.0 means the company is heavily leveraged.
• Goodwill: Large goodwill balances mean the company overpaid for acquisitions. This often gets written down.

3. Cash Flow Statement

This shows actual cash moving in and out. It's harder to manipulate than income.

Key numbers to check:

• Operating cash flow: Positive = the business generates real cash. Negative = it burns cash to operate.
• Free cash flow: Operating cash flow minus capital expenditures. This is the "real" profit.
• Stock-based compensation: Companies can boost "adjusted earnings" by excluding SBC, but it's a real cost to shareholders through dilution.

Red Flags to Watch For

1. Revenue growing but cash flow negative. The company might be recognizing revenue aggressively or burning cash on customer acquisition.
2. Increasing debt with no revenue growth. Borrowing to stay alive, not to grow.
3. Frequent "one-time" charges. If every quarter has a "non-recurring" expense, it's recurring.
4. Auditor changes. Switching auditors can mean the previous auditor found issues.
5. Delayed filings. Missing SEC deadlines often precedes bad news.

The 5-Minute Financial Health Check

1. Is revenue growing year-over-year? (Yes = good)
2. Is net income positive? (Yes = good)
3. Is operating cash flow positive? (Yes = good)
4. Is debt-to-equity under 2.0? (Yes = good)
5. Does the company have 12+ months of cash runway? (Yes = good)

If the answer to 3 or more is "No," proceed with caution. SimpliInvest's AI checks all of these automatically and factors them into the risk score.