How to Read a Stock's Financial Statements

Before buying an individual stock, you owe it to yourself to glance at the three core financial statements. The income statement shows revenue, costs, and the bottom line over a period, telling you whether the business is actually profitable. The balance sheet is a snapshot of what the company owns and owes on a single day, revealing whether debt is at dangerous levels relative to assets.

The cash flow statement may be the most important of the three. It strips out accounting choices and shows the real cash generated by operations, invested in the business, and returned to shareholders. Healthy companies consistently produce free cash flow well in excess of reported net income.

Look for steady revenue growth, expanding or stable margins, manageable debt, and rising free cash flow over five to ten years. Ratios like price to earnings, price to free cash flow, and return on invested capital let you compare across industries. None of this guarantees a winning pick, but it filters out a lot of obvious losers and forces you to think like an owner rather than a gambler.