How to read a set of company accounts

Step 1: Start with the profit and loss

The profit and loss shows performance over the period — revenue down to net profit. Look at whether revenue is growing, whether margins are holding, and whether growth in sales is turning into growth in profit. Falling margins on rising sales is a red flag.

Step 2: Read the balance sheet

The balance sheet shows position on a date — what the company owns, owes and is worth. Check working capital (current assets minus current liabilities), debt levels, and whether net assets are positive and growing.

Step 3: Follow the cash

The cash-flow statement reconciles profit to actual cash movement. A profitable company with poor operating cash flow is living on borrowed time — this statement exposes the gap that the profit and loss hides.

Step 4: Mine the notes

The notes are where the real detail lives: accounting policies, breakdowns, provisions and contingent liabilities, related-party transactions, and going-concern statements. Experienced readers go straight to the notes, because that is where surprises are buried.

Step 5: Read the trend, not the snapshot

One year tells you little; three years tells you the direction. Compare year on year, and use ratios to benchmark. Clean, well-presented accounts also make your own finance applications stronger.

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