Key financial statements are commonly used by investors and analysts to evaluate a company's financial health. In this post we go through and review these while will expand and discuss their analysis in depth later. What are these statements:

Company's in each financial reporting period will publish these statements enforced by law to give a better grasp of their financial position for the investors and analysts. With each you can evaluate to some extend the financial investment potentials.  

1. Income statement: The income statement shows a company's revenues, expenses, and net income over a specific period of time, usually a quarter or a year. It provides a snapshot of a company's profitability and can be used to evaluate trends in revenue growth, cost of goods sold, gross profit, operating expenses, and net income.
2. Balance sheet: The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It shows how a company has financed its operations, how much it owes, and how much it owns. The balance sheet can be used to evaluate a company's liquidity, solvency, and financial flexibility.
3. Cash flow statement: The cash flow statement shows a company's cash inflows and outflows over a specific period of time, usually a quarter or a year. It provides a snapshot of a company's ability to generate cash from its operations and can be used to evaluate its cash flow, liquidity, and ability to pay dividends.

When evaluating a company's financial health, investors and analysts typically look at the key financial ratios, such as the price-to-earnings ratio, debt-to-equity ratio, and return on equity. They also analyze the trends in revenue growth, gross profit margin, and operating expenses, as well as the company's cash flow and balance sheet. By analyzing these financial statements and key financial ratios, investors can gain a better understanding of a company's financial health, growth potential, and overall financial performance. However, it's important to consider these factors in conjunction with other factors, such as the company's industry, competitive landscape, and economic trends, before making investment decisions.

Let's say that an investor is evaluating two companies in the retail industry, Company A and Company B. The investor looks at the financial statements and key financial ratios for each company and finds the following:
Company A:

• High revenue growth rate of 15% per year
• Gross profit margin of 40%
• Debt-to-equity ratio of 1.0
• Price-to-earnings (P/E) ratio of 20

Company B:

• Low revenue growth rate of 2% per year
• Gross profit margin of 30%
• Debt-to-equity ratio of 1.5
• Price-to-earnings (P/E) ratio of 15

Based on these metrics, the investor may decide that Company A is a better investment than Company B. Here's how each metric could impact the decision:

• High revenue growth rate: A high revenue growth rate indicates that a company is growing quickly and gaining market share. In this case, Company A's high revenue growth rate may indicate that it has a stronger competitive position than Company B.
• Gross profit margin: A higher gross profit margin generally indicates that a company is able to generate revenue efficiently and has good pricing power. In this case, Company A's higher gross profit margin suggests that it may be able to generate higher profits than Company B.
• Debt-to-equity ratio: A high debt-to-equity ratio can indicate that a company is relying heavily on debt to finance its operations, which could be risky. In this case, Company B's higher debt-to-equity ratio may indicate that it is taking on more financial risk than Company A.
• Price-to-earnings ratio: The P/E ratio is a commonly used valuation ratio that compares a company's stock price to its earnings per share. A high P/E ratio indicates that investors are willing to pay more for each dollar of earnings, which could indicate that the stock is overvalued. In this case, Company A's higher P/E ratio suggests that investors are willing to pay more for its earnings than for Company B's earnings.

By analyzing these financial statements and key financial ratios, the investor can gain a better understanding of each company's financial health and potential for future growth. However, it's important to consider these factors in conjunction with other factors, such as the company's industry, competitive landscape, and economic trends, before making investment decisions.