In 30 seconds
- The three core financial statements are the balance sheet, the income statement and the cash flow statement.
- Income statement: does it earn money? Cash flows: does it collect it? Balance sheet: can it survive a bad year?
- They're linked: undistributed profit moves to the balance sheet, and ending cash on the cash flow statement is the balance-sheet cash.
- A company can earn a lot and still end the year with less cash if it invests, pays dividends or pays down debt.
- Always compare several years and equivalent periods, because every company closes its fiscal year on a different date.
Introduction
In the fiscal year that ended February 1, 2026, Home Depot earned $14,156 million. And yet it finished that year with less money in the bank than it started with: $1,389 million, down from 1,659 a year earlier. How does a company earn that much and still end up with less cash? To answer that, you have to look at all three of its financial statements at once. Any one of them on its own tells you only a third of the story.
Explanation
Financial statements are the reports a public company puts out every quarter and every year to show how it's doing. In the US they sit inside the Form 10-K annual report filed with the SEC; in Spain, listed companies send their annual accounts to the CNMV. For investing, you need three of them.
Think about your own finances. Your paycheck and your monthly bills tell you whether you make it to the end of the month: that's the income statement. What you own (your home, your savings) minus what you owe (the mortgage) is your net worth on a given day: that's the balance sheet. And your bank statement shows the money that actually came in and went out: that's the cash flow statement.
The income statement covers a period, a quarter or a year: revenue, costs, expenses, interest, taxes and, at the bottom, net income. It answers "does it make money?" We walk through it line by line in how to read an income statement.
The balance sheet is a snapshot on the closing date: assets, liabilities and shareholders' equity. It answers "can it get through a bad year?" Learn to read it in how to read a balance sheet for investing.
The cash flow statement sorts the real money into three buckets: operating (the business itself), investing (stores, plants, acquisitions) and financing (debt, dividends, buybacks). It answers "does the profit turn into cash?" This is where free cash flow comes from.
The neat part is how they hook into each other. There are three threads you can trace with your finger:
1. Net income on the income statement, minus dividends, piles up in retained earnings on the balance sheet.
2. That same net income is the first line of the cash flow statement, which then adjusts it step by step until it reaches real cash.
3. Ending cash on the cash flow statement is exactly the cash that shows up on the balance sheet.
If a thread doesn't tie out, something is off. So where do you start? Here's the order I'd suggest: the income statement to see whether it earns money, the cash flows to see whether it collects it, and the balance sheet to make sure it isn't living on debt.
Formula
Assets = Liabilities + Shareholders' equity
Ending retained earnings = Beginning retained earnings + Net income − Dividends (minor adjustments aside)
Ending cash = Beginning cash + Operating cash flow + Investing cash flow + Financing cash flow
Net margin = Net income / Revenue × 100
Example
Let's take Home Depot and its fiscal year ended February 1, 2026, as reported in the 10-K it filed with the SEC. Figures are in millions of dollars; the company calls that year "fiscal 2025."
Step 1: the income statement. Revenue of 164,683 and net income of 14,156 for the year ended February 2026. Net margin: 14,156 / 164,683 = 8.6%. It makes money, and plenty of it.
Step 2: the thread to the balance sheet. It paid 9,152 in dividends that year. What it didn't pay out, 14,156 − 9,152 = 5,004, lands on the balance sheet: retained earnings go from 89,533 to 94,537 between February 2025 and February 2026. It ties out to the million.
Step 3: the cash flow statement. The business generated 16,325 in operating cash flow in the year ended February 2026, more than its net income. It invested 8,980: 3,679 in stores and equipment and 5,410 to buy other companies. Financing took out a net 7,714, mostly dividends and debt repayment.
Step 4: the cash thread. 16,325 − 8,980 − 7,714 = −369. Add a currency effect of +99 and cash drops by 270: from 1,659 to 1,389, the exact figure on the balance sheet at February 1, 2026.
So, back to the opening question. Between acquisitions, dividends and debt, Home Depot paid out more cash than the business generated. Cash went down without the business getting any worse.
The table below compares Home Depot's net margin with its big rival, Lowe's, and with two retail chains, Walmart and Costco. Before you look: do you think Home Depot keeps more profit from each dollar of sales than Walmart does?
Real-data example
| Company | Ticker | Net margin |
|---|---|---|
| The Home Depot, Inc. | HD | 8.4% |
| Lowe's Companies, Inc. | LOW | 7.3% |
| Walmart Inc. | WMT | 3.0% |
| Costco Wholesale Corporation | COST | 3.0% |
How to read it
How to read it
One quick check per statement. The "good" bar follows the sector guide on Kaplio's stock pages; the "weak" bar is a rough guide:
| What you check | Good | Weak | Sector nuance |
|---|---|---|---|
| Net margin (income statement) | Over 10% and stable | Under 5% year after year | For grocers, a steady 3% is healthy; in software you'd expect more than 20% |
| Free cash flow / net income (cash flows) | 0.8 or higher | Under 0.5 for several years | Industrials and utilities invest heavily and tend to land lower |
| Net debt / EBITDA (balance sheet) | Under 1x | Over 3x | A regulated utility can live with up to 5.5x |
Home Depot clears the second test with room to spare: in the year ended February 2026, its free cash flow (16,325 − 3,679 = $12,646 million) came to almost nine of every ten dollars of net income.
Pitfalls and limitations
- Profit isn't cash. A sale on credit counts as revenue the day it's invoiced, even if the money arrives months later. If earnings grow and operating cash flow doesn't, ask why.
- Equity can be tiny at healthy companies. Home Depot had $12,813 million in shareholders' equity against 105,095 in total assets at February 1, 2026, after years of share buybacks. That isn't bankruptcy: it's money handed back to shareholders.
- Different year-ends. Home Depot closes its fiscal year in February, Nike in May and Microsoft in June. To compare them, use the trailing twelve months.
Case in point: Wirecard
In June 2020, Germany's Wirecard admitted that €1,900 million carried as cash on its balance sheet probably didn't exist. The money was supposedly sitting in trust accounts at two Philippine banks, and both banks denied holding it. The thread that snapped was the simplest one of all: the cash on the balance sheet has to actually be in a bank.
Practice on Kaplio
Frequently asked questions
What are the 5 basic financial statements?
In a US annual report you'll find five: the balance sheet, the income statement, the statement of comprehensive income, the statement of shareholders' equity and the cash flow statement, followed by the notes that explain how the numbers were built. For investing, the balance sheet, the income statement and the cash flow statement carry most of the weight.
What is a financial statement in simple terms?
It's a report card a company publishes about its own money. The income statement shows what it earned over a period, the balance sheet shows what it owns and owes on one date, and the cash flow statement shows the cash that actually moved. Public companies in the US file them with the SEC every quarter and every year.
What are the basic 4 financial statements?
The balance sheet, the income statement, the cash flow statement and the statement of shareholders' equity, which tracks how equity changes through earnings, dividends and buybacks. The first three are the ones investors read most, and they're linked: net income feeds retained earnings, and ending cash on the cash flow statement matches the balance sheet.