Financial statements are a company health checkup
Financial statements are reports, in a fixed format, of how a company earned, spent and accumulated money over a given period. For a person, the closest thing is a regular health checkup report. They sum up the state of a company in numbers so that anyone can read it by the same standard.
The financial statements of Korean listed companies are free for anyone to view on DART, the electronic disclosure system run by Korea's Financial Supervisory Service. Figures are disclosed every quarter, and audited figures follow once the year ends.
Financial statements consist of three main tables: the balance sheet, the income statement and the cash flow statement. Each answers a different question, and read together they give a three-dimensional picture of the company.
Balance sheet: what the company owns and what it owes
The balance sheet shows what a company owns, how much of it, and how much it owes at a specific point in time (the end of the reporting period). Korea now formally calls it the statement of financial position; balance sheet is its older name.
The structure is simple. Assets sit on one side, liabilities and equity on the other, and the equation “assets = liabilities + equity” always holds. Whatever a company owns was ultimately funded with other people's money (liabilities) or shareholders' money (equity).
Assets are what the company has, such as cash, inventory and buildings; liabilities are debts it must repay; equity is assets minus liabilities, the part that belongs to shareholders. Jupick's stability metrics, the debt ratio (liabilities ÷ equity) and the current ratio (current assets ÷ current liabilities), both come from this table.
Income statement: a year of earning and spending
The income statement shows how much revenue a company brought in over a period, usually a quarter or a year, and how much of it was left as profit. If the balance sheet is a photo of one moment, the income statement is closer to a video of a period.
Sales sit at the top, and costs and expenses are subtracted step by step to produce several layers of profit. Sales minus cost of sales and SG&A expenses is operating income, and the final result after interest, taxes and other items is net income.
Most of Jupick's profitability metrics come from this table: operating margin (operating income ÷ sales) and revenue growth (the change in sales from the previous year). Net income is also the input for ROE and PER (price to earnings ratio).
Cash flow statement: where the actual cash went
The cash flow statement shows how much actual cash came in and went out over a period. Profit on the income statement is a number calculated under accounting rules, so profit on the books and the cash actually left in the bank account can differ. The cash flow statement fills that gap.
Cash flow is split three ways. Operating cash flow is the cash actually earned from the core business; investing cash flow is cash spent on or recovered from equipment and stakes in other companies; financing cash flow is cash from borrowing or repaying debt and from paying dividends.
Whether operating cash flow stays positive year after year matters most. If a company reports profit on the books but its operating cash flow keeps coming in negative, the quality of that profit deserves a closer look. This table is used to screen out what Koreans call a black-ink bankruptcy, where a company collapses for lack of cash even while reporting a profit.
Where a beginner can start
There is no need to read every number from the start. It works better to set an order and narrow down from the big picture. First, check in the income statement whether sales and operating income have grown over several years and whether the company is consistently profitable. Whether the company makes a profit at all is the most basic question.
Second, check the debt ratio and current ratio in the balance sheet to see whether the weight of debt is manageable. Third, check in the cash flow statement whether operating cash flow is positive and moving in the same direction as profit, as a test of earnings quality.
A trend of 3 to 5 years matters far more than the figures for a single year. One good year can be temporary, but consistency over several years is hard to fake.
Jupick's grades automate and summarize exactly this process. They calculate metrics scattered across the three tables with the same yardstick so they can be compared at a glance, but the habit of reading the original statements yourself is valuable in its own right. This content is for information only and is not investment advice.
Frequently asked questions
- What should I look at first when reading financial statements?
- Start with the big picture and narrow down. First check in the income statement whether sales and operating income have grown over several years and the company is consistently profitable. Next, use the debt ratio and current ratio in the balance sheet to see whether the debt load is manageable. Finally, check in the cash flow statement whether operating cash flow is positive and moving in the same direction as profit. A trend of 3 to 5 years matters far more than a single year.
- If a company made a profit, why look at the cash flow statement separately?
- Because profit on the income statement is calculated under accounting rules, so profit on the books can differ from the cash actually left in the bank. The cash flow statement fills that gap and shows how much actual cash came in and went out. Whether operating cash flow stays positive matters most, and the statement is used to screen out black-ink bankruptcy, where a company collapses for lack of cash despite reporting a profit.