Company Financials – Explained in Simple Words with Formulas
📊 Company Financials – Explained in Simple Words with Formulas
Company Financials Explained in Simple Terms
Author: @nkit
If you want to understand how companies make money and how investors decide whether to invest in them, you need to learn the basics of company financials. Financial statements are reports that show how a company is performing — whether it’s earning profits, growing, or facing challenges.
This guide breaks down company financials into simple, easy-to-understand pieces so even beginners can make sense of them.
What Are Financial Statements?
Financial statements are documents that show important information about a company’s financial performance and position. The three main statements every investor should know are:
- Income Statement
- Balance Sheet
- Cash Flow Statement
1. Income Statement — Profits and Losses
The Income Statement shows how much money a company earned and spent over a specific period — usually a quarter or a year.
It includes:
- Revenue (Sales): Money the company earns from selling products or services.
- Expenses: Costs the company incurs to run its business.
- Net Profit: Revenue minus expenses — the amount left after all costs are paid.
If a company sells more than it spends, it earns a profit. If not, it may show a loss.
2. Balance Sheet — What the Company Owns and Owes
The Balance Sheet is like a snapshot of a company’s financial position at a single point in time. It shows:
- Assets: Things the company owns (cash, inventory, property).
- Liabilities: Money the company owes (loans, bills).
- Equity: Owner’s share — what remains after liabilities are subtracted from assets.
In simple terms:
Assets = Liabilities + Equity
This equation must always balance, and it helps investors understand how financially stable a company is.
3. Cash Flow Statement — Money In and Out
The Cash Flow Statement shows how cash moves in and out of the company over a period. It is divided into:
- Operating Activities: Cash from daily business operations.
- Investing Activities: Cash used for long-term assets (like machinery, property).
- Financing Activities: Cash from investors or loans.
This statement helps you see whether a company has enough cash to run its operations and meet its obligations.
Why Company Financials Matter to Investors
Understanding financials lets investors assess whether a company is making money, managing costs, and using cash wisely. Investors use financial information to answer questions like:
- Is the company profitable?
- Does it have a strong balance sheet?
- Is it generating positive cash flow?
Financial statements form the backbone of company analysis and help you make better investing decisions.
Key Ratios Every Beginner Should Know
Investors often use simple ratios to compare performance over time or against other companies:
- Profit Margin: How much profit a company makes for every rupee of sales.
- Debt-to-Equity: How much the company relies on debt compared to its own funds.
- Return on Equity (ROE): How efficiently a company uses shareholder money to make profits.
These numbers help simplify complex data and make comparisons easier.
Real-World Example (Simple)
Imagine you have a small shop. Over one year:
- You earned ₹10 lakh in sales (Revenue).
- Your expenses (rent, stock, salaries) were ₹8 lakh.
- Your profit is ₹2 lakh.
This is the basic idea behind the income statement: sales minus expenses equals profit.
If your shop had cash in the bank, stock on shelves, and owed some bills — those would show up in your balance sheet. If you bought new equipment or took a loan, that movement would appear in your cash flow statement.
These terms help you understand whether a company is strong, profitable, and worth investing in. Here are the top terms beginners should know:
1. Market Cap (Market Capitalization)
It shows how big a company is.
Formula: Market Cap = Share Price × Total Number of Shares
Example: ₹200 × 1 crore = ₹200 crore
2. P/E Ratio (Price to Earnings Ratio)
It tells how much investors are paying for ₹1 profit.
Formula: P/E = Share Price ÷ EPS
Example: ₹100 ÷ ₹10 = 10
3. EPS (Earnings Per Share)
How much profit is earned per share.
Formula: EPS = Net Profit ÷ Total Shares
Example: ₹10 crore ÷ 1 crore shares = ₹10
4. Book Value
Value of each share if company is liquidated.
Formula: (Assets – Liabilities) ÷ Total Shares
Example: ₹100 crore – ₹40 crore ÷ 1 crore = ₹60
5. ROE (Return on Equity)
How well the company uses shareholders' money.
Formula: (Net Profit ÷ Shareholder’s Equity) × 100
Example: ₹5 crore ÷ ₹25 crore = 20%
6. Debt-to-Equity Ratio
How much debt vs own capital.
Formula: Total Debt ÷ Shareholder’s Equity
Example: ₹30 crore ÷ ₹60 crore = 0.5
7. Dividend
Profit shared with shareholders.
Example: ₹5 per share
8. Dividend Yield
Return from dividend as % of share price.
Formula: (Dividend ÷ Share Price) × 100
Example: ₹5 ÷ ₹100 = 5%
9. Bonus Share
Free shares given to existing shareholders.
Example: 1:2 means 1 free share for every 2 owned.
10. Rights Issue
Discounted shares offered to existing investors.
Example: Buy at ₹80 when market price is ₹100.
Final Thoughts
Company financials might seem complex at first, but once you understand the basics — revenue, expenses, assets, liabilities, and cash flow — you start seeing companies in a clearer light. These basics help you judge whether a company is strong, growing, or facing trouble — and that’s a key skill for long-term investing success.
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⚠️ This content is for educational purposes only. Please do your own research before making any investment decisions.
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