The 3 Pillars of Financial Truth: Balance Sheet, P&L, and Cash Flow

Imagine you are a doctor and a new patient walks in. To check their health, you wouldn't just guess, right? You would ask for three specific things: an X-ray, a Blood Test, and a Heart Scan.

Investing in a company without looking at its Financial Statements is like treating a patient without any tests. It's gambling, not investing.

Every public company is required to publish three "medical reports" every quarter:

1. The Income Statement (P&L): Like a speedometer—how fast is the company making money?
2. The Balance Sheet: Like a health checkup—how much does the company own vs. owe?
3. The Cash Flow Statement: Like an oxygen monitor—is the company breathing real cash or just faking it?

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1. The Income Statement (P&L)

Think of this as a Movie . It shows you what happened over a period of time (e.g., from Jan 1st to Dec 31st). It tells the story of how the company performed.

Here is how to read it from top to bottom:

• Top Line (Revenue): The total money coming in from selling products. If this isn't growing, the business is stagnant.
• COGS (Cost of Goods Sold): The direct cost to make the product (raw materials, labor).
• Gross Profit: Revenue minus COGS. This shows if the core product is profitable.
• Operating Expenses: Salaries, rent, marketing, electricity.
• Bottom Line (Net Income): What is left for shareholders after paying everyone (including the government).

Warning Signal: If Revenue is going up but Net Profit is going down, the company is becoming inefficient.

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2. The Balance Sheet

If the P&L is a movie, the Balance Sheet is a Snapshot Photo taken on a single day (e.g., "As of Dec 31st"). It tells you the company's financial position at that exact moment.

It is based on the golden equation of accounting:

A. Assets (What we OWN)

Things that put money in your pocket.

• Current Assets: Cash, Inventory, and money customers owe us (Receivables). These are liquid.
• Non-Current Assets: Factories, Machines, Patents, Brand value. These stay for years.

B. Liabilities (What we OWE)

Things that take money out of your pocket.

• Current Liabilities: Bills due soon (suppliers, salaries, short-term loans).
• Long-term Liabilities: Big bank loans payable over 10-20 years.

C. Equity (What is TRULY ours)

If you sold all assets and paid all liabilities, what is left belongs to the owners (shareholders). This is called Net Worth or Book Value .

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3. The Cash Flow Statement

This is the Truth Serum . Why? Because "Profit" on the Income Statement is an opinion based on accounting rules. You can record a "Sale" even if the customer hasn't paid you yet.

But Cash Flow tracks actual money moving in and out of the bank account. You cannot fake cash. It answers one question: "Did the bank balance go up or down?"

It has three parts:

• Operating Activities (CFO): Cash generated from the actual business (selling goods). This MUST be positive for a healthy company.
• Investing Activities (CFI): Cash spent on buying new machines or factories (Capex). This is usually negative because growing companies spend money to expand.
• Financing Activities (CFF): Cash from taking loans or issuing shares (Inflow), or paying dividends/repaying loans (Outflow).

4. How They Link Together

These three are not separate; they are siblings.

1. Net Income from the P&L flows into the Balance Sheet as Retained Earnings (increasing Equity).
2. It also starts the Cash Flow Statement .
3. Cash at the end of the Cash Flow Statement becomes the Cash Balance on the Balance Sheet.

5. Summary for Investors

P&L: Tells you if the product is good and profitable.
Balance Sheet: Tells you if the company is strong enough to survive bad times.
Cash Flow: Tells you if the company is honest and sustainable.