Financial statements are essential documents for assessing the true health of a business . Whether you are a buyer, seller, investor, or supporter, knowing how to read them allows you to make informed decisions , structure a fair price , or negotiate financing with confidence.
This comprehensive guide explains, step by step, what to analyze in each financial statement , which indicators to monitor, and how to interpret the results rigorously.
Why analyze financial statements?
The financial statements allow us to:
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Understanding the financial performance of a company
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Identify your strengths and risks
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Evaluate its market value (notably via EBITDA)
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Convince lenders or partners
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Justify a sale price or structure a purchase offer
They are also crucial in a due diligence review and often serve as the basis for analysis for the granting of a loan by a bank or the BDC.
The 3 basic financial statements you need to know
Here is a summary table to help you understand the role of each financial statement and the key elements to analyze:
|
Financial statement |
Objective |
Indicators to monitor |
|---|---|---|
|
Balance sheet (or statement of financial position) |
Show what the company owns and owes as of a given date |
Current assets, current liabilities, working capital, long-term debt, equity |
|
Income statement |
Present income, expenses and profits over a given period |
Revenue, EBITDA, gross margin, net profit, fixed and variable costs |
|
Statement of cash flows |
Explain the real money movements in the business |
Cash flow from operations, investments, debt repayments |
Glossary of accounting terms to know
Current assets : monetary items or items easily convertible into money (cash, customer accounts, inventory)
Current liabilities : short-term payables (less than 12 months)
Equity : shareholders' share in the company (investments + retained earnings)
EBITDA : Earnings before interest, taxes, depreciation and amortization. Represents operating profitability
Depreciation : loss of value of an asset (e.g. equipment) spread over time
Cash flow : actual movement of money, as opposed to simple accounting profit
Working capital : current assets – current liabilities. Measures the company's ability to cover its immediate obligations
Long-term debt : loans or bonds payable over more than one year
Net result : final profit (or loss), after all expenses and taxes
Gross margin : revenue – cost of sales. Indicates gross operating efficiency
Operating expenses : costs related to operations (salaries, rent, marketing, etc.)
Frequently Asked Questions – Financial Statements
Are all financial statements required to sell a business?
Yes. For a serious transaction, all three statements (balance sheet, income statement, cash flow statement) for the past three years are required. This reassures the buyer and facilitates financing.
How many years of financial statements are required for a sale or takeover?
Ideally, three full years. This allows you to see trends and compare data.
Does a net profit mean the company is healthy?
Not always. A net profit can mask a lack of liquidity or an increase in debt. The overall picture must be analyzed.
Should I consult an accountant to interpret the financial statements?
Yes, highly recommended. An accountant can identify anomalies, adjust EBITDA, and validate the quality of the information.
Are internal financial statements reliable?
They are useful, but should be validated or audited by a CPA, especially in the context of a sale or acquisition.
What is the role of financial statements in financing a takeover?
They are used to justify the value of the company, to determine its repayment capacity and to reassure lenders (bank, BDC, Investissement Québec, etc.).
Practical tips for reading financial statements correctly
Take the time to compare data over three years. Look for stable trends or sudden anomalies. Analyze the evolution of revenue, margins, and EBITDA. Pay attention to long-term debt and working capital structure. And above all, make sure the company generates positive cash flow without relying on external financing.
Trnsfr helps you understand financial statements
At trnsfr, we support you with concrete tools to reliably evaluate a company:
Whether you are a buyer or a seller, understanding financial statements gives you a real advantage when negotiating.
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