Introduction to Interpreting the Numbers

As an investor, you have likely learned about each of the three main financial statements. You learned about the different components of the income statement and how to determine if a company is profitable. You learned about the distinctions among assets, liabilities, and shareholders' equity and where to find them on the balance sheet. Finally, you went over the statement of cash flows to figure how much cash a company uses or makes from its operating, investing, and financing activities.

But now that you have this knowledge about each of the financial statements, how do you, as an investor, use it?

In this lesson we'll apply this knowledge in a process called financial statement analysis. Financial statement analysis looks to explain, often through financial ratios, the important relationships among the different numbers included in the financial statements. The ultimate goal of financial statement and ratio analysis is to help you interpret the numbers and come up with a clear picture of a company's financial performance and condition.

Before we jump in, we should inform you that the following ratios are for non-financial companies only. Financial companies, such as banks or insurance companies, have unique characteristics. As a result, their financial statements look much different than those of most other companies.