Reading the Three Financial Statements: How to Understand the “Language of Money” in Your Company

Executive Summary

The three financial statements the Balance Sheet, Income Statement, and Cash Flow Statement tell the complete story of any company.

No successful investor or manager can make an informed decision by looking at just one statement. While the income statement tells you about profit, the balance sheet reveals stability, and the cash flow statement exposes reality.

This article aims to simplify these three statements and connect them in a professional way that helps you uncover the strengths and weaknesses of your company’s financial performance.

Key Terms Glossary (Sidebar)

1. The Balance Sheet: The Power Scale

The balance sheet is the foundation of financial analysis.
It is built on the golden accounting equation:

Assets = Liabilities + Equity

• Assets: Everything the company owns (cash, inventory, real estate, brand value).

• Liabilities: What the company owes to others (loans, payables).

• Equity: What remains for the owners an indicator of true wealth.

SEO Tip: When analyzing the balance sheet, always focus on asset quality. Are these assets capable of generating quick cash, or are they idle?

2. The Income Statement: The Profit Engine

Also known as the Profit & Loss (P&L) statement, it attracts the most attention because it answers one key question: Is the company profitable or not?

• Revenue: Total sales before expenses.

• COGS: Direct costs of producing goods or services.

• EBITDA: Earnings before interest, taxes, depreciation, and amortization the core measure of operating strength.

• Net Income: The final figure that defines the period’s success.

3. The Cash Flow Statement: The Hard Reality

This is where the difference between accounting profit and bank liquidity becomes clear.

It is divided into three activities:

• Operating Activities: Cash generated from core business operations.

• Investing Activities: Cash used for buying or selling assets.

• Financing Activities: Cash from loans, capital injections, or dividend payments.

Why it matters: A company may report SAR 1 million in profit yet go bankrupt if that profit is tied up in unpaid receivables while salaries and suppliers are due immediately.

4. Connecting the Three Statements: The Full Picture

A professional financial analyst links them as follows:

• Net income flows into retained earnings on the balance sheet.

• Changes in assets and liabilities (like inventory growth) appear as movements in the cash flow statement.

• New assets on the balance sheet show up as cash outflows under investing activities.

5. Efficiency Levers: Horizontal & Vertical Analysis

• Horizontal Analysis: Comparing current-year figures with prior years to identify trends.

• Vertical Analysis: Expressing each item as a percentage of total sales or total assets to assess relative importance.

6. Regional Financial Data Sources (2020–2026)

• Official stock exchanges (Tadawul, Dubai Financial Market) for benchmarking listed companies.

• Tax and Zakat portals to assess statutory obligations and their impact on net income.

• Automated financial models using advanced Excel linked with ERP systems for real-time reporting.

Case Study: A “Profitable” but “Distressed” Construction Company

The Challenge:
The income statement showed strong profits, yet the company struggled to pay worker salaries.

Analysis Insight:
Linking the three statements revealed profits locked in overdue accounts receivable, leading to negative operating cash flow.

Result:
The company halted projects with delayed payments and focused on advance payment contracts, restoring cash balance within six months.

Financial Statement Review Checklist

• Do total assets equal liabilities plus equity?

• Is operating cash flow positive?

• Is there unexplained growth in inventory?

• Is gross margin stable or declining?

• Are retained earnings growing year over year?

• Is debt aligned with repayment capacity?

• Have non-recurring profits been excluded from core analysis?

Common Mistakes in Financial Analysis (SEO Tips)

• Focusing only on net profit: Profits may come from asset sales, not core operations.

• Ignoring notes to the accounts: Critical details are often hidden in the footnotes.

• Overlooking inflation: Comparing 2026 figures with 2020 numbers without adjusting purchasing power.

Key Takeaways

• The balance sheet is the foundation: It shows resilience.

• The income statement is the engine: It shows operational efficiency.

• Cash flow is oxygen: Without it, operations stop even if profits exist.

• Integration is the secret: Read all three statements together.

• Regular analysis: Quarterly reviews prevent major financial deviations.

7-Step Action Plan: Review Your Statements Now

1. Extract all three statements under proper accounting standards.

2. Compare revenue growth against cost growth.

3. Calculate working capital (Current Assets − Current Liabilities).

4. Track cash: Did profits turn into cash or receivables?

5. Analyze debt structure and maturity.

6. Update forecasts based on real historical data.

7. Digitize reporting with systems that automatically link all statements.

References

• International Accounting Standards (IAS/IFRS), latest 2025 edition

• Institute of Management Accountants (IMA) – Financial Statement Analysis Guide

• Financial performance reports issued by Arab stock exchanges