A beginner’s guide to analyzing listed companies’ financial reports—this one article is all you need!

Days of inventory outstanding = 360 ÷ Inventory turnover ratio Inventory turnover ratio = Cost of goods sold ÷ Average inventory balance Average inventory balance = (Beginning inventory balance + Ending inventory balance) ÷ 2 The shorter the days of inventory outstanding, the higher the inventory turnover ratio, and thus the stronger the company’s inventory management capability. 3) A company’s ability to manage its accounts receivable is reflected in how long—within a full business cycle—the receivables tie up cash, i.e., the accounts receivable turnover days. Accounts receivable turnover days = 360 ÷ Accounts receivable turnover ratio Accounts receivable turnover ratio = Operating revenue ÷ Average accounts receivable balance Average accounts receivable balance = (Beginning accounts receivable balance + Ending accounts receivable balance) ÷ 2 The shorter the accounts receivable turnover days, the higher the accounts receivable turnover ratio, and thus the stronger the company’s ability to collect cash. XII. The Cash Flow Statement: A Matter of Life and Death The cash flow statement records a company’s cash inflows and outflows, comprising three sections: operating activities, investing activities, and financing activities. 1) A positive net cash flow from operating activities is naturally preferable (★ examine financial reports for five consecutive years). If net cash flow from operating activities has been positive for five consecutive years, it indicates strong and sustained profitability from core operations. Conversely, persistently negative net operating cash flow suggests the company consistently spends more than it earns. A single year of negative cash flow may reflect strategic investments—for instance, increased R&D or sales expenses—to secure future growth; a single year of positive cash flow may simply be due to temporary favorable circumstances. 2) Cash flows from investing activities fall into two categories: internal investment and external investment. Generally speaking, a negative net cash flow from investing activities is preferable. A negative net cash flow from investing activities signals active capital expenditure and expansion—i.e., the company is spending heavily to grow. A positive net cash flow from investing activities, by contrast, often indicates asset disposals, which may serve as an early warning sign of declining performance and weakening operational capacity. 3) Cash flows from financing activities include cash received from equity investments, borrowings, and cash used to repay debt, among others. Overall, a negative net cash flow from financing activities is generally preferable—but a positive figure does not necessarily indicate trouble; it may simply mean the company is raising funds for growth. If those funds finance high-return investments, fundraising can be entirely justified. Thus, interpretation must be context-specific. XIII. The Enigmatic Cash Flow Portrait First portrait: +++ (‘Sprite’ type) (Note: Each ‘+’ or ‘−’ corresponds respectively to operating, investing, and financing activities—as introduced earlier.) This signifies a company that generates profits, earns investment income, yet still seeks external funding—a ‘sprite’-type profile. Such firms are either newly listed or have underperforming core businesses prompting strategic pivots. Second portrait: +−+ (‘Bull’ type) This reflects a company reinvesting operating cash inflows—and supplementing them with externally raised funds—into aggressive expansion, resembling a charging bull. Third portrait: +−− (‘Cash Cow’ type) This denotes a company whose operating cash inflows fully cover its growth needs and still leave surplus to reward shareholders—like a dairy cow converting feed into milk, sustaining itself while delivering value to its owners. Fourth portrait: ++− (‘Broody Hen’ type)

How do you analyze a company’s balance sheet and the composition of its assets and liabilities?

How to analyze a company’s balance sheet and the composition of its assets and liabilities? Analysis is as follows: I. Meaning of the Balance Sheet 1.1 The balance sheet is the primary accounting statement reflecting a company’s financial position—i.e., its assets, liabilities, and equity—at a specific point in time, typically at the end of each accounting period. 1.2 Prepared in accordance with the fundamental accounting equation, the balance sheet classifies compliant accounting items—assets, liabilities, and equity—into two major sections: “Assets” and “Liabilities and Equity.” After journal entries, bookkeeping, and closing procedures, it condenses the enterprise’s static financial condition at a given date into a single accounting report. 1.3 Beyond supporting internal error detection, strategic decision-making, and fraud prevention, the balance sheet also enables all readers to grasp the company’s operational status swiftly and efficiently. II. Structure of the Balance Sheet The balance sheet comprises three components: assets, liabilities, and equity. 2.1 Assets and liabilities represent two distinct perspectives on the same business activities. 2.11 Assets reflect the amount of funds under the company’s control, manifested through forms such as cash, inventory, and fixed assets—indicating how funds are held. 2.12 Liabilities reflect the sources of funding—i.e., how assets were financed—such as short-term or long-term borrowings. III. Structural Analysis of the Balance Sheet By examining the proportion each component occupies relative to total assets, we assess and evaluate the company’s overall financial health. 3.1 Asset Structure Analysis The asset structure refers to the respective shares of current assets, long-term investments, fixed assets, intangible assets, and other assets within total assets. Analyzing the ratios of assets with differing liquidity levels helps determine whether the asset structure is sound. 3.2 In analyzing asset structure, a key metric is the current asset ratio, calculated as: Current asset ratio = (Current assets ÷ Total assets) × 100% Generally, the higher the proportion of current assets to total assets, the stronger the company’s liquidity and ability to convert assets into cash. When analyzing asset structure, we may similarly apply this ratio-based approach to assess the weight of cash assets, accounts receivable and inventory, production-related assets, intangible assets, and long-term equity investments.