How well is a company performing? Is it “buying low” and “selling high”? How can we tell? In this chapter, we’ll be looking at the financial statements companies use to report on their performance. These statements give us a clear picture of a company’s financial health — if we know how to interpret them.

Previously, we learned the most basic formula that drives business performance:

A company whose revenues are higher than its costs should be doing fine, right? It’s not quite that simple. A company can truthfully report that its costs are much lower than its revenues — that it’s profitable — and still be headed straight for bankruptcy! It all depends on how and when a company reports profits, revenues, and costs, and when the company experiences the cash flows associated with these events.