Understanding a Financial Statement

• 1). Read the balance-sheet section of the financial statement. The balance sheet details the basic performance metrics of the company for the stated reporting period, including gross income and total expenses, and relates those numbers to the bottom-line net earnings for the period.
  
  
• 2). Understand earnings per share, also referred to as EPS. Knowing the final dollar figures for net earnings does not tell you much without something to use as comparison. The final section of a financial statement's income report discloses a company's net earnings for the period for each outstanding share of company stock.
  
  For example, presume that Company A earned $2 million last quarter but only $1.8 million during the most recent quarter. Further presuming Company A has 1 million outstanding shares, then its EPS will have slipped from $2 last quarter to $1.80 in the most recent quarter.
  
  
• 3). Examine the income report and cash flow statement of the financial statement to identify one-time items or charges. There are times when a company will absorb one-time items or charges (such as for a legal settlement) that negatively impact or positively inflate the earnings for that quarter. Carefully examine the income report and cash flow statement to fully understand the results for any given period. Also make sure that positive financial results are repeatable and whether poor results are understandable, given business situations.