How to Read a Company’s Financial Statements Before Buying Its Stock
A beginner-friendly guide to understanding revenue, profit, debt, cash flow, and what the numbers really tell you.
By Adrian Munji | Finance & Investing | 11 min read
When you are new to investing, it is easy to think that buying a stock starts with looking at its share price.
You see a company trading at KSh 20 per share and another trading at KSh 200. One looks cheap. The other looks expensive. But the share price alone tells you very little about whether a business is actually worth owning.
A stock is a piece of a business. So before buying it, one of the most useful things you can do is understand how that business actually makes money, how profitable it is, what it owns, what it owes, and whether it generates enough cash to support itself. That is where financial statements come in.
In Article 3, we covered the seven questions to ask before buying any stock. This article goes deeper into one of those questions — how do you actually read the numbers behind a company?
Financial statements can look intimidating at first. There are pages of numbers, accounting terms, notes, and tables that seem designed for professional accountants. But as a beginner investor, you do not need to understand every single line. You need to know what to look for, what questions to ask, and how the numbers connect.
Here are the three financial statements you should start with.
A stock is a piece of a business. Understanding the business means understanding the numbers behind it, not just the price of the shares.
1. The Income Statement: Is the Business Making Money?
The income statement tells you how much money a company generated during a particular period and what happened to that money after expenses. Think of it as the company’s financial performance report.
Revenue
Revenue is the money a company earns from selling its products or services. For example, imagine a company made KSh 100 million from selling its products this year — that KSh 100 million is its revenue.
The first question you should ask is: is revenue growing? If a company has increased its revenue from KSh 100 million to KSh 120 million, that is a 20% increase. But revenue growth by itself is not enough — a company can increase sales while becoming less profitable. That is why we need to go further down the income statement.
Expenses
A business has to spend money to generate revenue. These expenses can include employee costs, electricity, rent, marketing, raw materials, technology, interest on debt, taxes, and many others. If a company generates KSh 100 million in revenue but spends KSh 90 million running the business, it obviously has less left over than a company generating the same revenue while spending KSh 60 million. This brings us to profit.
Operating Profit
Operating profit shows how much the business earns from its operations after accounting for operating expenses. It helps you understand whether the actual business is becoming more or less profitable.
Net Profit
Net profit is what remains after the company accounts for expenses such as operating costs, financing costs, taxes, and other relevant items. This is one of the numbers investors pay close attention to.
But don’t simply ask whether profit increased. Ask why it increased. Maybe revenue grew. Maybe expenses fell. Maybe the company sold an asset. Maybe it benefited from a one-time accounting adjustment. Understanding the reason behind the number is often more important than the number itself.
2. Margins: How Much Does the Company Keep?
Looking at revenue and profit separately is useful. Looking at them together can be even more useful. This is where profit margins come in.
Suppose Company A generates KSh 100 million in revenue and makes KSh 20 million in net profit. Its net profit margin is 20% — in simple terms, the company keeps about KSh 20 in net profit for every KSh 100 of revenue. Now imagine another company generates KSh 100 million but only makes KSh 5 million in profit. Its net profit margin is just 5%. The first company is keeping much more of its revenue as profit.
As an investor, you can then ask: are margins improving, declining, or stable, and why are they changing? A growing company with improving margins can be particularly interesting because it may be becoming more efficient as it grows.
3. The Balance Sheet: What Does the Company Own and Owe?
The income statement tells you about performance over a period. The balance sheet gives you a snapshot of the company’s financial position at a particular point in time. It answers three basic questions: what does the company own, what does it owe, and what belongs to shareholders?
These are represented by assets, liabilities, and shareholders’ equity, connected through the basic accounting equation:
Assets = Liabilities + Equity
You don’t need to become an accountant to understand the idea. If a company owns KSh 100 million worth of assets and owes KSh 40 million, the remaining KSh 60 million represents the shareholders’ equity.
Assets
Assets are resources that the company owns or controls that have economic value — cash, property, equipment, inventory, receivables, investments, and intangible assets. Cash is particularly important because a company can be profitable on paper and still struggle if it does not have enough cash available. But don’t stop at cash. Look at what makes up the company’s assets and whether those assets make sense for the type of business it operates.
Liabilities
Liabilities are obligations the company owes — loans, trade payables, lease obligations, taxes payable, and other financial obligations. Debt deserves particular attention. Debt is not automatically bad; a company can use it to expand, purchase equipment, build infrastructure, or finance growth. The important question is whether the company can comfortably manage its debt. A highly profitable company with manageable debt can be very different from a struggling company carrying a large debt burden.
Shareholders’ Equity
Equity represents the shareholders’ claim on the company’s assets after liabilities are taken into account. It can include things such as share capital and accumulated profits.
One useful measure investors sometimes look at is return on equity (ROE), which shows how effectively a company generates profit from shareholders’ equity — essentially, how efficiently the company is using shareholders’ money to generate profits. Like every other ratio, ROE should be compared with the company’s history and with other businesses in the same industry.
4. The Cash Flow Statement: Is the Business Actually Generating Cash?
This is one of the most important statements for a beginner to understand. The cash flow statement tracks how cash moves in and out of the business, generally divided into three sections.
Operating activities
This shows cash generated or used by the company’s normal operations. If a company consistently generates strong operating cash flow, that can be a positive sign.
Investing activities
This includes purchasing or selling property, equipment, investments, and other long-term assets. For example, a company building new factories or expanding its telecommunications network may spend significant amounts of cash on capital expenditure. That cash leaving the business is not necessarily a bad thing — it could represent investment in future growth.
Financing activities
This includes borrowing money, repaying debt, issuing shares, and paying dividends. This section helps you understand how the company is financing itself and returning money to shareholders.
5. Profit Is Not the Same as Cash
This is one of the most important lessons you can take away from financial statements. A company can report a profit without receiving all of that money in cash immediately.
For example, imagine a company sells KSh 10 million worth of products to customers on credit. It may record the sale as revenue even though the customers have not paid the company yet. That is one reason why investors should not look at net profit in isolation — you want to know whether the business is also generating cash from its operations. The relationship between profit and cash flow can tell you a lot about the quality of a company’s earnings.
6. Let’s Look at a Real Company: Safaricom
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Now let’s put this into practice. Safaricom is a useful example because its annual reports provide several years of financial information that investors can study.
In FY25, Safaricom reported Group service revenue of approximately KSh 371.4 billion, up 10.8% from the previous year. Its operating profit (EBIT) was approximately KSh 104.1 billion, and net profit attributable to shareholders came in at approximately KSh 69.8 billion, up 11% year-on-year.
At first glance, these numbers tell us something important: the business generated significant revenue and remained highly profitable. But the more interesting part is looking at the trend, not just the single year.
Revenue has grown for five straight years. Profit hasn’t moved in a straight line alongside it — it dipped over FY22 to FY24, largely due to heavy investment and currency losses tied to Safaricom’s expansion into Ethiopia, before recovering strongly in FY25 as the core Kenyan business offset easing Ethiopia losses.
That immediately gives us a better question than simply asking whether Safaricom is “profitable”: why did profit dip while revenue kept growing, and what changed to bring it back?
That question leads us into the real work of analysis. We would need to investigate operating costs, depreciation, financing costs, taxation, currency effects from Ethiopia, and other factors rather than assuming revenue growth automatically translates into equal profit growth, or that one bad year, or one good one, tells the whole story. That is exactly why financial statements matter — they give you clues about what is happening underneath the headline numbers.
7. A Few Ratios Worth Knowing
You do not need dozens of ratios to start analyzing companies. A handful can already make a major difference.
Revenue Growth — tells you how quickly the company’s revenue is increasing or decreasing. Ask: is the company’s core business growing?
Net Profit Margin — tells you how much of the company’s revenue becomes net profit. Ask: is the company becoming more or less profitable?
Return on Equity (ROE) — shows how effectively the company generates profit from shareholders’ equity. Ask: is management generating attractive returns on the capital shareholders have invested?
Debt and Leverage — look at how much debt the company carries relative to its financial resources and earnings. Ask: could the company comfortably handle its obligations if business conditions became difficult?
Free Cash Flow — broadly, the cash a company generates after the capital expenditure required to maintain or grow the business. Ask: after investing in the business, is there still meaningful cash left over?
The important thing is not to memorize ratios for the sake of memorizing them. Use them to answer questions.
8. Don’t Analyze Just One Year
One of the easiest mistakes for a beginner is looking at a single annual report and making a conclusion.
Imagine a company reports revenue up 15%, profit up 30%, and strong cash flow. That sounds great. But what if the previous year was terrible? Or what if the profit increase came from selling an asset rather than improving the core business?
This is why trends matter. Try looking at three to five years of financial information when it is available. Look for patterns: is revenue consistently growing, are margins stable, is debt increasing, is cash flow improving, are profits becoming more volatile, has the number of shares increased significantly?
You are not looking for one perfect number. You are looking for the story told by several numbers over time.
9. Financial Statements Don’t Exist in Isolation
Numbers tell you what happened. They don’t always tell you why it happened. That’s why financial statement analysis should be combined with your understanding of the actual business.
For example, if a company’s profit falls, you need to investigate. Did competition increase? Did input costs rise? Did the company enter a new market? Did regulations change? Did the currency move against it? Did management make a major investment? Did a one-off event affect the results?
This is where your business analysis becomes important — the kind we covered building in Article 3. Before you buy a stock, you should understand the company well enough to explain how it makes money and what could cause that business model to become stronger or weaker.
10. What Should You Actually Look For Before Buying?
Once you understand the three statements, you can start asking a simple set of questions.
Revenue — is the business growing?
Profit — is the company becoming more profitable?
Margins — is it keeping more or less of each shilling it earns?
Cash flow — is the business actually generating cash?
Debt — is the balance sheet strong enough to handle its obligations?
Returns — is management generating attractive returns on shareholders’ capital?
Trends — are the numbers improving over several years?
Business quality — does the company have a strong business model or competitive advantage?
Risks — what could cause these numbers to deteriorate?
Valuation — even if the business is excellent, am I paying a reasonable price for it?
That last question matters because a great company can still be a poor investment if you pay far too much for its shares.
11. Where Do You Find This Information?
You don’t need expensive investment software to begin. Start with the company’s annual reports, financial statements, investor presentations, results announcements, and investor relations page — publicly listed companies usually publish these materials for investors. Safaricom, for example, maintains an investor relations section containing its financial reports and results.
You can also use information from regulators and other reliable financial sources to cross-check what you find. The important thing is to develop the habit of going to primary sources rather than relying entirely on social media posts or someone else’s opinion about a stock.
12. You Don’t Need to Understand Everything
When I first started learning about investing, financial statements could easily look like a wall of numbers. But you don’t have to understand every accounting term before you can start learning from them.
Income statement → How is the business performing?
Balance sheet → What does the business own and owe?
Cash flow statement → Where is the cash coming from and going?
Then connect the three. A company might be growing revenue quickly but carrying too much debt. Another might be highly profitable but struggling to generate cash. Another might have excellent cash generation but very little growth. The goal is to understand the whole picture.
Final Thoughts
Buying a stock should not be about finding a ticker that looks exciting. It should start with understanding the business behind that ticker.
Financial statements give you a way to do that. They help you move beyond asking whether a stock will go up, and toward understanding whether the business behind it is actually strong.
You don’t need to become an accountant to become a better investor. You just need to become comfortable reading the numbers, questioning them, and connecting them back to the business itself.
Because ultimately, when you buy a stock, you aren’t just buying a price on a screen. You’re buying a piece of a business. And the better you understand that business, the better equipped you are to make an informed investment decision.
This is Article 6 in a series on investing for beginners. You may also enjoy: How to Choose Your First Stock as a Beginner Investor and How to Build Your First Investment Portfolio as a Beginner
Adrian Munji is a Business and Finance student at USIU Africa, concentrating in Finance and Investment, with experience in financial research and content creation for international clients.
