💡

TL;DR: The income statement tells you whether a company is profitable, the balance sheet tells you how solid its financial foundation is, and the cash flow statement tells you whether real cash is actually coming in -- read all three together to get the full picture of a company.

Concepts

Income Statement: How Much Is the Company Actually Earning?

The income statement is like a company's report card, recording revenue and expenses over a period (a quarter or a year). Reading it from top to bottom, the logic is straightforward:

Revenue: Total sales the company generated
Minus cost of goods sold -> Gross Profit
Minus operating expenses (SG&A, R&D) -> Operating Income
Plus/minus non-operating items -> Pre-Tax Income
Minus income tax -> Net Income
Divided by shares outstanding -> Earnings Per Share (EPS)

In short, revenue is the starting point and EPS is the bottom line. Each layer in between helps you filter: is the company making money from its core business, or from one-off non-operating items?

Balance Sheet: What Is the Company Worth?

The balance sheet is a snapshot at a single point in time. Its core equation is simple:

Assets = Liabilities + Shareholders' Equity

The left side represents what the company owns (assets), and the right side shows where the money came from -- borrowed (liabilities) or contributed by shareholders (equity).

Both assets and liabilities are split into two categories:

Current: Items that will be converted to cash or come due within one year, such as cash, accounts receivable, and short-term debt
Non-current: Items with a longer horizon, such as property, plant & equipment, long-term investments, and long-term debt

When reading a balance sheet, focus on: Does the company have too much short-term debt? Is there enough cash on hand? Is shareholders' equity growing over time?

Cash Flow Statement: Is the Cash Really Coming In?

Many investors overlook the cash flow statement, but it is arguably the most honest of the three. Income statement profits can be inflated through accounting practices, but the cash flow statement tracks actual cash moving in and out.

It is divided into three sections:

Operating Cash Flow (Operating CF): Cash generated by core business operations -- this is the most important one. If a company consistently reports profits but its operating cash flow is negative, the reported earnings are not translating into real money.
Investing Cash Flow (Investing CF): Cash spent on or received from buying/selling equipment, property, and long-term investments. Growth-stage companies typically show a negative figure here (because they are spending to expand).
Financing Cash Flow (Financing CF): Cash from borrowing, repaying debt, issuing shares, or paying dividends. This shows whether the company is raising capital or returning money to shareholders.

All three statements should be cross-referenced. For example, if a company has impressive EPS but weak operating cash flow, you should question the quality of its earnings.

Hands-On: Using CTSstock

Go to /analysis/2330 (using TSMC as an example)
Click the Financial Statements tab at the top
You will see the income statement, balance sheet, and cash flow statement
Use the toggle buttons above to select:
- Single Quarter: View one quarter at a time -- useful for spotting trends
- Cumulative Quarters: Year-to-date figures that smooth out seasonal effects
- Annual: Full-year data for long-term comparison
Start with annual data to identify the big picture, then switch to single-quarter view to examine recent changes

FAQ

Q: Which of the three statements is the most important? A: None is the most important on its own -- they are meant to be read together. But if forced to pick just one, most investors choose the cash flow statement, because cash is the hardest thing to fake.

Q: Why do some companies have high EPS but a stagnant stock price? A: The earnings may come from one-time non-operating gains (e.g., selling land) rather than sustainable core business growth. In these cases, looking at operating income on the income statement and operating cash flow on the cash flow statement gives a more realistic picture.

Q: How often should I review financial statements? A: Companies listed on the Taiwan Stock Exchange (TWSE) publish quarterly reports. It is a good practice to review your holdings' financials at least once per quarter, with a more thorough analysis when the annual report comes out.