1. Income statement to read operating results
Revenue, gross profit, operating profit and net profit after tax describe results over a period. In analysis you should look at trends, gross‑margin composition and operating‑margin, not just select a single attractive EPS.
2. Balance sheet: assessing resilience
A balance sheet is a snapshot at a point in time. Cash, accounts receivable, inventory, short‑term liabilities and long‑term liabilities help you assess liquidity; when goodwill and intangible assets are a large proportion, you should further question acquisition and impairment risk.
3. Cash flow statement to assess quality
Operating cash flow reflects core cash generation from operations; investing cash flow often includes capital expenditures; financing cash flow shows borrowing, repayments, dividends and buybacks. Over the long term, persistent divergence between net income and operating cash flow should be investigated.
4. Build the four‑question process
- Is revenue growth coming from price, volume, M&A, or one‑off factors?
- Do gross margin and operating margin show an interpretable trend?
- Are profits converted into cash, and does working capital consume cash?
- Do liabilities, interest and dilution dilute per‑share value?
After completing preliminary research, you can useDCF valuation scenario tooltest sensitivity of value to cash flow, growth rate and discount rate.