Why Financial Statements Matter#

Imagine buying a car without knowing its mileage, maintenance history, or whether the engine even works. Sounds risky, right? Yet many people buy stocks with even less information about the companies they're investing in.

Financial statements are official documents that reveal a company's financial health. They show how much money a company makes, what it owns, what it owes, and how cash flows through the business.

The Foundation of Informed Investing#

When you buy a stock, you're buying a piece of a real business. The price you pay should reflect what that business is actually worth. But how do you know what a company is worth?

Financial statements provide the answers. They're like a company's medical records—they tell you:

Question	Financial Statement
Is the company profitable?	Income Statement
What does the company own and owe?	Balance Sheet
Does the company generate real cash?	Cash Flow Statement

Speculation vs. Informed Investing#

There's a crucial difference between guessing and knowing:

Speculation means buying a stock because:

Someone on social media recommended it
The price has been going up lately
You "have a feeling" about the company

Informed investing means buying because:

You understand how the company makes money
You've analyzed its profitability trends
You've assessed its financial strength and risks

Reality Check

Studies show that most individual investors underperform the market. A major reason? They make decisions based on emotions and tips rather than financial analysis.

What Financial Statements Reveal#

Financial statements answer the questions that matter most to investors:

Profitability Questions#

Is revenue growing or shrinking?
Are profit margins improving or declining?
How much does the company earn per share?

Stability Questions#

Can the company pay its bills?
How much debt does it carry?
Does it have enough cash reserves?

Cash Flow Questions#

Does reported profit turn into real cash?
Is the company investing in growth?
Can it afford to pay dividends?

The Competitive Edge#

Here's a secret: most retail investors never read financial statements. They rely on headlines, analyst opinions, or stock tips.

By learning to read financial statements, you gain an advantage:

You see what others miss - Spotting problems before they make headlines
You make your own decisions - Not depending on others' opinions
You invest with confidence - Knowing exactly what you own
You avoid costly mistakes - Recognizing red flags early

Pro Tip

Warren Buffett reads hundreds of financial statements every year. He's said that understanding financial statements is "the language of business." You don't need to read hundreds, but knowing how to read them gives you a real edge.

The Connection to Stock Prices#

In the short term, stock prices can move for all sorts of reasons—news, sentiment, market trends. But in the long term, stock prices follow earnings and cash flows.

Think about it:

A company that grows profits year after year will likely see its stock rise
A company with declining revenue and mounting debt will likely see its stock fall

Financial statements help you understand whether a stock price makes sense—or whether the market has it wrong.

What You'll Learn#

In this course, you'll master the three core financial statements:

Income Statement - The "report card" showing profitability
Balance Sheet - The "snapshot" of financial position
Cash Flow Statement - The "reality check" on cash

More importantly, you'll develop the mindset to analyze any company and make your own informed investment decisions.

Key Takeaways

Financial statements reveal a company's true financial health
Informed investing is based on data, not speculation or tips
Understanding financials gives you an edge over most investors
Long-term stock prices follow earnings and cash flow performance
You'll learn to read all three core financial statements