What are Financial Statements?
Financial statements are accounting reports that comprehensively show a company's financial condition and business performance. The main components are as follows.
- Income Statement: Shows the net profit by calculating the revenue and expenses over a certain period.
- Balance Sheet: Shows the assets, liabilities, and equity at a specific point in time.
- Cash Flow Statement: Shows the inflow and outflow of cash.
How to Assess a Company's Health Using Financial Statements

Financial Health
Profitability and Cost Analysis
The income statement can be used to analyze a company's profitability and cost structure. For example, you can check whether sales are steadily increasing and costs are being managed stably. If net profit continues to increase, it is a sign that the company is healthy.
- Total Revenue: Shows how much revenue the company generated over a specific period.
- Operating Profit: The value obtained by subtracting the cost of goods sold and operating expenses from revenue, indicating how much profit the company's core business generated.
- Net Profit: Refers to the final profit after deducting all expenses (interest expense, taxes, etc.).
Assessment of Financial Stability
The balance sheet can be used to analyze the ratio of assets to liabilities. A low debt-to-asset ratio means that the company is financially stable.
- Current Ratio: The ratio of current assets (cash, inventory, etc.) to current liabilities (short-term debt, etc.), indicating the company's ability to repay short-term debts. Generally, a current ratio of 100% or more indicates that the financial condition is sound in the short term.
- Debt Ratio: The ratio of total debt to equity, used to assess the overall financial health of a company. The lower the debt ratio, the better the financial condition.
Cash Flow Analysis
The cash flow statement allows you to understand the inflow and outflow of cash. Positive cash flow means that the company is generating sufficient cash through its daily operations.
- Cash Flow from Operating Activities: Indicates the cash flow generated from the company's core operating activities. A high value indicates that the company's operations are active and financially healthy.
- Cash Flow from Investing Activities: Indicates the cash flow generated from equipment investments, real estate purchases, etc. A negative value indicates that significant investments are being made, but this can increase long-term growth potential.
- Cash Flow from Financing Activities: Indicates the cash flow generated from stock issuance, loans, dividend payments, etc. This value is related to changes in the company's capital structure.
Financial Ratio Analysis
Various financial ratios can be used to more accurately assess the health of a company.
- Return on Equity (ROE): The ratio of net profit to equity, indicating how efficiently a company is using its equity.
- Gross Profit Margin: The ratio of gross profit to revenue, indicating how much profit is generated from the sale of products or services.
- Debt Ratio: The ratio of total debt to total assets, used to assess the overall financial health of a company.
Easy Ways to Understand Financial Statements
Understanding basic terminology: Understanding basic terms such as assets, liabilities, and equity will greatly help in interpreting financial statements.
- Seek professional help: Getting help from an accountant or financial expert will allow you to clearly understand financial statements.
- Utilize educational materials: Build your basic knowledge of financial statements through online courses or books.
Conclusion
Financial statements are an important tool that comprehensively shows a company's financial condition and business performance. Through this, you can assess the health of the company and make better financial decisions. The ability to understand financial statements well is a key element in ensuring the success and sustainability of a company.
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