A Beginner’s Guide to Reading Financial Statements

Written by Haider Saleem
Journalist and Political Analyst | LinkedIn / X

Financial statements give you a clearer picture of a company’s health – how much it earns, what it owns, and whether it can sustain growth.

For halal-conscious investors, understanding these documents can help you assess both performance and compliance.

This beginner-friendly guide covers:

1. What financial statements are and why they matter.
2. How to read the balance sheet, income statement, and cash flow statement.
3. How the three statements connect.
4. The Annual Report.
5. Where to find Shariah-relevant insights.

Let’s break down each statement in simple terms.

1. Why Financial Statements Matter

Financial statements are formal records summarizing a company’s activities and performance. Publicly listed companies publish them regularly, and investors use them to answer questions like:

• Is this company making a profit?
• Does it have too much debt?
• Can it finance future growth?

You don’t need to be an accountant – just a curious investor who knows where to look.

2. The Balance Sheet: what a company owns vs. owes

What it shows:

A snapshot of a company’s financial position at a single point in time—usually the end of a quarter or year.

Quick example:

Let’s say Company A has $100 million in assets, $60 million in liabilities, and $40 million in equity. That means for every dollar it owns, it owes 60 cents—and shareholders effectively own 40 cents.

Key sections:

• Assets –  What the company owns (cash, inventory, property)
  • Current assets: Expected to be converted into cash within a year
  • Non-current assets: Long-term holdings like equipment or software
• Liabilities – What the company owes (loans, bills, deferred revenue)
  • Current liabilities: Due within a year
  • Non-current liabilities: Due in more than a year

Shareholders’ Equity –  What’s left for shareholders if assets were sold and debts paid

Formula:
Assets = Liabilities + Shareholders’ Equity

Beginner tip:
Check the debt-to-equity ratio. High debt levels may mean more risk in uncertain markets

3. The Income Statement: profit over time

What it shows:

The company’s financial performance over a reporting period—like a quarter or year.

Key sections:

• Revenue (Sales): Total money brought in
• Cost of Goods Sold (COGS): Direct costs of producing goods
• Gross Profit: Revenue minus COGS
• Operating Expenses: Salaries, marketing, admin costs
• Operating Profit (EBIT): Gross profit minus operating expenses
• Net Income: Final profit after all costs and taxes
• EPS (Earnings per Share): Net income divided by number of shares

Beginner tip:

Look for rising EPS. It can be a good sign that the company is growing profitably

4. The Cash Flow Statement: where the money is going

What it shows:

The movement of actual cash into and out of the business.

Three main sections:

1)      Operating Activities: Core business activities (e.g. product sales)
2)      Investing Activities: Buying/selling assets (e.g. equipment, property)
3)      Financing Activities: Raising or repaying capital (e.g. loans, dividends)

Why it matters:

A company might show a profit on its income statement but still be short on cash. This statement reveals the reality.

Beginner tip:

Look for consistently positive cash flow from operations. It’s a strong indicator of financial health.

5. How These Statements Work Together

Each statement shows a different piece of the puzzle, but they’re closely connected:

Statement	What it Shows	Timeframe	Key Use
Income Statement	Profitability	Over time	Is the company making money?
Balance Sheet	Financial position	At a point in time	How much does it own or owe?
Cash Flow Statement	Actual cash movement	Over time	Is it generating real cash?

For example:

·         Net income from the income statement affects retained earnings on the balance sheet
·         The cash flow statement begins with net income and adjusts for cash vs. non-cash items
·         The ending cash balance on the cash flow statement appears under assets in the balance sheet

6. Annual Reports and Notes: not just numbers to look at

Beyond the main statements, annual reports offer deeper insight:

• Management Discussion & Analysis (MD&A): The company’s own view of performance and risks
• Notes to the Financials: Details on accounting methods, one-off events, or obligations
• Shareholders’ Equity Statement: Explains changes to ownership value over time.

These sections give you context. Why did profits fall? Was it a one-off cost or a bigger trend?

7. Halal Investing Context: what to look for

Shariah-compliant investing uses financial statements to screen companies based on ethical and financial criteria.

Here’s how statements help:

• Balance Sheet – Used to check that interest-bearing debt is below at an acceptable level
• Income Statement – Reveals the level of non-halal income (e.g., interest, gambling, alcohol) against total revenue
• Cash Flow Statement – Helps evaluate liquidity and assess whether financing is overly dependent on interest-bearing debt

Final Thoughts

Financial statements are the language of business. The more fluent you become, the more empowered your halal investment decisions will be.

You don’t have to master it all at once. Start by checking a company’s balance sheet and income statement. Ask:

Does it make a profit? How much debt does it carry? Where is its cash going?

Disclaimer: The content is for informational purposes only and does not constitute legal, investment or financial advice.
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