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Hey everyone, many of us sometimes see things like "financial analysis" and "reading financial statements" and feel like it's a complicated subject that's not for us.
Today, we'll learn about a simple and easy analysis model called the Three Statement Model that anyone can use to understand a little bit about the company they're investing in or want to work for.
What is the 3 Statement Model?
Simply put, the 3 Statement Model is a way to analyze companies using three basic financial statements:
Income Statement: Shows how much money the company earned and what it spent on expenses during a specific period.
Balance Sheet: Provides a snapshot of the company's financial position on a specific date, meaning how much cash they have and how much they owe.
Cash Flow Statement: Shows the inflow and outflow of cash during a specific period.
Let's Understand Better with an Example:
Imagine you want to understand "Future Investment" company. You can use the 3 Statement Model this way:
Income Statement: See how much money the company earned from sales during the year and how much they spent on expenses. Did net income increase or decrease compared to the previous year?
Balance Sheet: See how much cash the company has and whether it increased or decreased compared to the previous year. Does the company rely more on equity (shareholders' money) or debt?
Cash Flow Statement: See how much money the company received from customers during the year and how much they spent on paying salaries, purchases, etc. Does the company have a surplus of cash or is it suffering from tight liquidity?
By using this information, you can get a preliminary picture of the company's performance and financial health.
Where Can We Use the 3 Statement Model?
Quick Company Analysis: You can use it to quickly understand the company's financial position before you invest in it.
Comparing Companies: You can compare two companies in the same field using the same data from the financial statements.
Track Company Performance Over Time: You can track certain indicators in the financial statements over different periods to understand the company's trends.
What Does the 3 Statement Model Tell Us?
The 3 Statement Model doesn't provide a complete analysis of the company, but it helps us understand important things like:
Company Profitability: The company's ability to generate profits.
Company Liquidity: The company's ability to meet its short-term financial obligations.
Company Efficiency: The company's ability to manage its financial resources and achieve a good return.
What Are the Limitations of the 3 Statement Model?
Provides Preliminary Analysis: This model doesn't analyze every aspect of the company; we need to use it with other analysis tools.
Relies on Data Quality: The accuracy of the results depends on how accurate the information is in the financial statements.
Conclusion
The 3 Statement Model is a useful tool for investors and analysts to analyze the financial position of companies in a preliminary way. But we need to be aware that it's not the only tool, we need to use it with other analysis tools and remember that the quality of information in the financial statements affects the results.
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