Introduction to Financial Statements

 Introduction to Financial Statements

Financial statements are where we can search for companies with the golden durable competitive advantage. Financial statements come in three distinct flavors:

 

First, there is the Income Statement: The income statement tells us how much money the company earned during a set period of time. The company’s accountant traditionally generates income statements for shareholders to see every three months during the fiscal year and the whole fiscal year. Using the company's income statement, We can determine such things as the company's margins, its return equity, and, most important, the consistency and direction of its earnings. All of these factors are necessary for determining whether the company is benefiting from a durable competitive advantage.

 

The second flavor is the Balance Sheet: The balance sheet tells us how much money the company has in the bank and how much money it owes. Subtract the money owed from the money in the bank and we get the net worth of the company. A company can create a balance sheet for any given day of the year, which will show what it owns, what it owes, and its net worth for that particular day.

 

Traditionally, companies generate a balance sheet for shareholders to see at the end of each three months ( called quarter ) and at the end of the accounting or fiscal year. Investors and traders can use some of the entries on the balance sheet - such as the amount of cash the company has or the amount of long-term debt it carries - as indicators of the presence of a durable competitive advantage.

 

Third, there is the Cash Flow Statement: The cash flow statement tracks the cash that flows in and out of the business. The cash flow statement is good for seeing how much money the company is spending on capital improvements. It also tracks bond and stock sales and repurchases. A company will usually issue a cash flow statement along with its other financial statements. In the upcoming articles, we will explore in detail the income statement, balance sheet, and cash flow statement entries and indicators that Investors use to discover whether or not the company in question has a durable competitive advantage.