How to read a company's balance sheet, P&L and cash flow
Three statements, one story. A beginner's guide to reading a listed company's financials, using a simple made-up company as the example.
Every listed company in India publishes financial results every quarter and a full annual report every year. Most investors look at one line — profit — and stop. The full picture comes from three statements read together. You don’t need to be an accountant; you need to know what each one is for.
The three statements in one line each
- Balance sheet: what the company owns and owes on a given date.
- Profit and loss statement (P&L): how much it earned and spent over a period.
- Cash flow statement: how much cash actually came in and went out over that period, and why.
You can find all three in the annual report on the company’s investor relations page, and in results filings on the BSE and NSE websites. Look for the consolidated statements, which include subsidiaries, unless you have a reason to study the parent alone.
Our example company
To keep it concrete, we’ll use Example Fans Ltd, a made-up manufacturer. Every number below is illustrative and invented for teaching — it does not describe any real company. Figures are in ₹ crore.
1. The balance sheet
| What it owns (assets) | ₹ cr | What it owes and is owned by (liabilities + equity) | ₹ cr |
|---|---|---|---|
| Factories and machinery | 300 | Shareholders’ equity | 330 |
| Inventory | 80 | Long-term borrowings | 100 |
| Receivables (money customers owe) | 120 | Short-term borrowings | 30 |
| Cash | 50 | Trade payables (money owed to suppliers) | 90 |
| Total | 550 | Total | 550 |
The two sides always balance: everything the company owns was paid for either by shareholders (equity) or by lenders and suppliers (liabilities).
Questions to ask:
- How much debt? Total borrowings are ₹130 crore against equity of ₹330 crore — a debt-to-equity ratio of about 0.4.
- Can it pay its near-term bills? Current assets (inventory, receivables, cash) are ₹250 crore; current liabilities (short-term borrowings and payables) are ₹120 crore. The current ratio is about 2.1.
2. The profit and loss statement
| Line | ₹ cr |
|---|---|
| Revenue from operations | 800 |
| Less: materials, staff and other expenses | (680) |
| Operating profit (EBITDA) | 120 |
| Less: depreciation | (30) |
| Less: interest | (15) |
| Profit before tax | 75 |
| Less: tax | (19) |
| Net profit | 56 |
From this:
- Net profit margin = 56 ÷ 800 = 7%. Of every ₹100 of sales, ₹7 is left for shareholders.
- Return on equity (ROE) = 56 ÷ 330 ≈ 17%. That’s how much profit the company generates on shareholders’ money.
- Interest cover = operating profit after depreciation (₹90 crore) ÷ interest (₹15 crore) = 6 times. The higher, the more comfortably it services debt.
Watch for “exceptional items” — one-off gains or losses, such as selling a property. Strip them out to see the underlying business.
3. The cash flow statement
| Section | ₹ cr |
|---|---|
| Cash from operations | +40 |
| Cash from investing (new machinery) | −60 |
| Cash from financing (new loans, minus dividends) | +25 |
| Net change in cash | +5 |
Here’s the interesting part. Example Fans reported ₹56 crore of profit, but generated only ₹40 crore of cash from operations. Why? If you compared two years of balance sheets, you might find receivables jumped — customers were buying but paying later. Profit was booked; cash wasn’t collected.
One year of this isn’t alarming. Several years of profits running well ahead of operating cash flow is a classic warning sign worth investigating.
The company also spent ₹60 crore on machinery, more than it generated, and borrowed to fill the gap. That may be sensible expansion — or a strain. The annual report’s management discussion should explain which.
How the statements connect
- Net profit from the P&L, minus dividends, adds to equity on the balance sheet.
- Cash on the balance sheet changes by exactly the net change in cash in the cash flow statement.
- New borrowing shows up in both financing cash flow and borrowings on the balance sheet.
If you understand those three links, you understand the logic of accounting.
What to do: a 10-minute checklist
- Use five years of data, not one. Trends matter more than a single snapshot.
- Compare operating cash flow with net profit each year.
- Track debt-to-equity and interest cover — is borrowing rising faster than profit?
- Check receivables and inventory growth against revenue growth.
- Compare ratios with direct competitors in the same industry; a “good” margin in retail differs from one in software.
- Read the auditor’s report and notes for qualifications, related-party transactions and contingent liabilities.
Unfamiliar terms? Our glossary explains them in plain English.
This article is educational. The company and figures are fictional, and nothing here is a recommendation to buy or sell any security.
This article is for education only, not personalised investment, tax or legal advice. Rules and rates change. Check the latest official sources or a qualified professional before acting. Spotted an error?Tell the editor.
