The Ultimate Cheat Sheet for Financial Statement Analysis

If you're in credit, you have to size up a company’s financial health—fast. But what if you're not an accountant? Don't sweat it. This cheat sheet breaks down the essentials so you can read financials, spot red flags, and make smarter credit decisions. No CPA license required.

📊 Decoding the Big Three

Income Statement. Balance Sheet. Cash Flow. Rather than memorize every line, here are the sections that matter most as you assess risk decisions.

Income Statement (aka Profit & Loss)

Tells you: Is this business actually making money?

• Revenue: Total sales
• COGS: Direct costs to make those sales
• Gross Profit: Revenue minus COGS
• Operating Expenses: Rent, salaries, etc.
• Net Income: The “bottom line” profit after everything

Balance Sheet

Tells you: What does this company own vs. owe—right now?

• Assets: Cash, receivables, property, inventory
• Liabilities: Loans, accounts payable, anything owed
• Equity: Assets minus liabilities = company’s net worth

Cash Flow Statement

Tells you: Can they pay their bills and fund operations?

• Operating Activities: Day-to-day cash flow
• Investing Activities: Buying/selling assets
• Financing Activities: Loans, credit lines, equity funding

‍

📐 Ratios That Matter for Credit Decisions

These formulas pull powerful insights from financials—here’s what to calculate and why:

Current Ratio
Current Assets ÷ Current Liabilities
Can they cover their short-term debts? (Look for >1)
‍
Quick Ratio
(Current Assets - Inventory) ÷ Current Liabilities
Like the Current Ratio, but stricter. Ignores inventory fluff.

Debt-to-Equity
Total Liabilities ÷ Shareholders’ Equity
How much is financed with debt? High ratio = higher risk.

Net Profit Margin
Net Income ÷ Revenue
How efficient is this business at turning revenue into profit?

Return on Assets (ROA)
Net Income ÷ Total Assets
Are they using their assets wisely to generate earnings?

‍

🚨 Common Tricks & How to Spot Them

Not all financial statements are created equal. Some companies use clever accounting tricks to make their numbers look better than they are. Here’s what to watch out for:

• Premature Revenue Recognition: Companies may recognize revenue before it’s actually earned, such as booking sales before a product is shipped or a service is rendered. Look for irregular spikes in revenue or changes in accounting methods.
  ‍
• Off-Balance-Sheet Debt: Some companies keep debt off the balance sheet to make their financials look cleaner. This can include leases, joint ventures, or special purpose entities. Check for notes in the financials that explain any off-balance-sheet arrangements.
  ‍
• Underestimated Liabilities: Some companies understate their liabilities by making overly optimistic assumptions about future expenses or legal obligations. Review footnotes for contingencies or pending lawsuits that could impact the company’s financial stability.
  ‍
• Creative Depreciation: Companies may manipulate depreciation methods to reduce expenses and inflate profits. Be aware of any significant changes in depreciation methods or asset lifespans that might distort the financial picture.

‍

😬 When a Business Looks Healthy, But Isn’t

Sometimes the story looks good on paper—until you dig deeper:

‍

• High Profits with Low Cash Flow: A company may report strong profits but have poor cash flow due to delayed receivables or excessive spending. If the cash flow statement is weak while the income statement looks healthy, dig deeper into how cash is actually moving in and out of the business.
  ‍
• Increasing Debt with Declining Profits: If a company is taking on more debt to fund operations but profits are stagnant or shrinking, it’s a warning sign that the company might be running out of sustainable growth opportunities.
  ‍
• Overstated Inventory: Sometimes, companies inflate inventory numbers to make it look like they’re holding more value than they actually have. If inventory is unusually high or growing faster than revenue, it could be a red flag that goods aren’t selling.
  ‍
• Frequent Loan Renewals or Refinancing: If a company is constantly refinancing debt or renewing loans, it could indicate they’re struggling to maintain liquidity or meet their financial obligations.

‍

The Bottom Line: Read Between the Lines

Analyzing financial statements doesn’t require an accounting degree—but it does require a solid understanding of the key numbers that reveal a company’s financial health. By knowing how to read income statements, balance sheets, and cash flow reports, and using key ratios to assess stability, you’ll be in a better position to make informed decisions about credit risk.

So, remember:

• Read all three financial statements.
• Use a few smart ratios.
• Watch for shady accounting moves.
• Don’t ignore cash flow—it’s the lifeblood of any business.

With this cheat sheet in hand, you’ll make faster, smarter credit decisions—and spot trouble before it hits your books.

‍