If you're reading this article, you likely already recognize the significance of financial statements, as they serve as the primary source of information regarding a company's financial health.

But what specific aspects should you focus on? And how can you determine if a company is thriving or facing difficulties?

In this article, you'll find practical guidance to help you analyzing company financials. After all, that’s precisely what s-peek was designed for: to enable you to easily and intuitively interpret financial statements, even if you’re not a financial analyst.

Balance sheet and income statement

Financial statements are documents that depict a company's financial position at a specific point in time, typically at the end of the fiscal year. 

A standard set of financial statements is composed of several documents, with the two primary ones being:

• the balance sheet
• the income statement

The balance sheet: a snapshot of a Company's Resources

The balance sheet portrays what a company owns and owes at the end of the financial year, highlighting the resources available to tackle the next one.

It basically illustrates:

• The resources available to the company (assets)
• The company's debts and financial obligations (liabilities)
• The difference between the company's resources and its obligations (equity)

1. Assets 

Assets include the resources available to the company. These can be divided into fixed assets and current assets.

1. Fixed Assets
   

   These are resources owned by the company that will be in the company's possession for at least 12 months, often for much longer. They are categorized into:

   . Tangible fixed assets: such as property, plant, and equipment;
   . Intangible fixed assets: trademarks, patents, licenses;
   . Other fixed assets: include company's investments in other entities, such as equity investments or bonds
   

   
   

2. Current Assets
   Include resources held by the company that can be converted into cash in the short term. 
   

   . Cash and cash equivalents: cash on hand or in bank accounts
   . Accounts receivable (Debtors): invoices issued but not yet collected
   

   . Inventory (stocks): raw materials, finished goods, merchandise, or maintenance materials
   . Other receivables: receivables that do not fall into the previous categories, such as tax credits, bonds or government securities (BOTs) with a maturity of less than 12 months.

2.Liabilities

Liabilities indicate the company's commercial and financial debts. They can be long-term liabilities if the maturity is greater than one year, or current liabilities if they must be repaid within 12 months. They include:

• Financial liabilities: loans or other forms of short or long-term financing from banks or other lenders;
• Trade payables: payments due to suppliers;
• Other liabilities: include taxes owed to the government, employee salaries, social security contributions, etc.

3. Equity

In other words, assets represent how a company utilizes its funds, while liabilities indicate the sources of those funds.

The difference between assets and liabilities constitutes equity. 

This information gives us an initial insight into the company's financial health. A positive value means that the company's total resources exceed its debts. Conversely, a negative indication suggests that the company is technically insolvent, which may prompt shareholders to either liquidate the company or restore equity to a positive state through a new capital contribution. 

How the company used its resources: the income statement

The income statement shows how the company managed its resources during the year. In other words, it shows:

• How revenues were generated
• What expenses were incurred
• The final result (profit or loss) achieved

Revenues and expenses can derive from:

• Operating activities
• Financing activities
• Non-recurring activities

1. Operating activities

Operating activities encompass those directly tied to the production and sale of goods or services that constitute the company's core business. 

In the income statement, the income and expenses generated by operating activities are reported in specific categories:

• Revenues from sales: represent the company's turnover, i.e. the value of goods or services sold.
• Production cost: outlines the expenses incurred by the company in producing its goods and services, including the costs of purchasing raw materials and employee salaries.

• EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation): this is calculated by subtracting the direct costs of production (such as raw materials and direct labor) from sales revenues.
  
• EBIT (Earnings Before Interest and Taxes): this is obtained by subtracting depreciation, amortization, and impairment losses from EBITDA

2. Financing activities

Financing activities encompass the company's investment and financing operations. 

• Financial revenue: revenues from capital investments, such as interest from bank deposits or dividends from investments in other companies.
• Financial expenses: financing costs incurred by the company, such as interest on loans and bank charges.

The balance between these two elements determines the financial Profit/Loss.

3. Non-recurring activities

Finally, non-recurring items are occasional and non-recurring economic events in the life of a company, which generate exceptional income or expenses.

An example of this could be the capital gain from the sale of a property or a division of the company, as well as damages caused by a weather event. 
It is important to note that this area has been strongly reduced by the new accounting standards, which tend to include many non-recurring events in operating or financing areas, depending on their nature.

Net Income: Profit or Loss for the Period

The result of operating activities, along with the result from financing activities and the balance of non-recurring items, contribute to defining net income: the profit or loss for the period before taxes.

Net income affects the balance sheet by either increasing or decreasing equity.

s-peek: Financials' Analysis Made Simple

Analyzing financial statements can seem overwhelming, but it is essential for understanding a company's financial health.
Simply looking at profit or net equity is not sufficient; you must also evaluate profitability, debt levels, and the company's ability to meet its payment obligations.

s-peek simplifies the process of understanding financial statements by highlighting essential aspects and presenting a clear picture of a company's financial situation. With s-peek, you can quickly determine whether the data is positive or negative, enabling you to make more informed decisions.

In the second part of this article, we will explore in detail how financial analysis can address these and other critical questions regarding a company's overall health.