If you want to move beyond guessing and start investing intelligently, you must understand company financials.
Financial statements tell you:
- Is the company making money?
- Is it growing?
- Is it drowning in debt?
- Is it financially healthy?
Professional investors always check financials before buying shares on the
Australian Securities Exchange.
Let’s break this down in a simple and practical way.
What Are Company Financials?
Company financials are official reports showing:
- Income
- Expenses
- Profit
- Assets
- Debt
- Cash flow
Public companies must publish these reports regularly so investors can analyse performance.
These reports are usually released:
- Half-yearly
- Annually
The 3 Main Financial Statements
Every listed company publishes three key statements.
1️⃣ Income Statement (Profit & Loss Statement)
This shows:
- Revenue (sales)
- Expenses
- Net profit
It answers the question:
👉 Is the company profitable?
Key Terms:
Revenue – Total money earned from sales
Expenses – Costs of running the business
Net Profit – Revenue minus expenses
Simple Example
Revenue: $1 billion
Expenses: $800 million
Net Profit: $200 million
That $200 million is what remains after all costs.
If profit is rising every year, it’s generally a positive sign.
2️⃣ Balance Sheet
The balance sheet shows what the company owns and owes.
It includes:
Assets – What the company owns
Liabilities – What the company owes
Equity – Ownership value
Formula:
Assets = Liabilities + Equity
Example
Assets: $5 billion
Liabilities: $2 billion
Equity: $3 billion
A strong balance sheet usually means:
- Manageable debt
- Solid asset base
- Financial stability
3️⃣ Cash Flow Statement
Profit does not always mean cash.
The cash flow statement shows:
- Cash coming in
- Cash going out
- Operating cash flow
Cash flow is important because companies need cash to:
- Pay salaries
- Pay dividends
- Invest in growth
- Pay debt
A company can show profit but still have cash problems.
Why Financials Matter
Share prices move based on expectations.
If a company reports:
- Higher profit than expected → price may rise
- Lower profit than expected → price may fall
Even companies inside the
S&P/ASX 200 can experience sharp movements after earnings announcements.
Financial results drive investor confidence.
Key Financial Ratios You Must Know
Understanding a few simple ratios helps you compare companies.
Earnings Per Share (EPS)
EPS = Net Profit ÷ Total Shares
It tells you how much profit each share earns.
Higher EPS growth is usually positive.
Price to Earnings Ratio (P/E)
P/E = Share Price ÷ EPS
This shows how expensive a share is relative to earnings.
- High P/E → Investors expect strong growth
- Low P/E → May be undervalued (or risky)
Debt to Equity Ratio
Debt ÷ Equity
Shows how much debt the company uses.
Too much debt increases risk.
Return on Equity (ROE)
Net Profit ÷ Shareholder Equity
Shows how efficiently a company uses investor money.
Higher ROE is generally better.
Growth vs Stability
When analysing financials, ask:
- Is revenue growing?
- Is profit growing?
- Is debt increasing?
- Is cash flow strong?
Growth companies may reinvest profits.
Mature companies may focus on stability and dividends.
Example Analysis
Imagine two companies:
Company A:
- Revenue growing 15% per year
- Rising profits
- Moderate debt
- Strong cash flow
Company B:
- Flat revenue
- Declining profits
- High debt
- Weak cash flow
Which appears stronger?
Financial analysis helps you answer logically — not emotionally.
Warning Signs in Financials
Be cautious if you see:
- Declining revenue for several years
- Rising debt without growth
- Negative cash flow
- Large one-off accounting gains
- Falling margins
Not all falling prices are opportunities.
Sometimes, financial problems are real.
Where to Find Financial Reports
You can find official reports:
- On the company’s investor relations website
- On ASX announcements page
- Through brokerage research tools
Always use reliable sources.
Why Students Should Learn Financial Analysis
Understanding financials helps you:
- Avoid hype stocks
- Reduce speculation
- Invest based on facts
- Build long-term confidence
Even if you invest in ETFs, knowing financial basics improves decision-making.
Beginner Checklist Before Buying a Share
✔ Is revenue growing?
✔ Is profit stable or increasing?
✔ Is debt manageable?
✔ Is cash flow positive?
✔ Does the company have competitive advantage?
If most answers are positive, it’s worth deeper research.
Final Thought
Understanding company financials turns you from a speculator into an investor.
Prices move because of expectations.
Financial reports show whether those expectations are justified.
Mastering this skill is a major step from Level 1 to Level 2 investing knowledge.