Start with the economic story
Financial statements are three views of the same business. The income statement explains performance over a period, the balance sheet shows resources and obligations at a point in time, and the cash-flow statement reconciles accounting profit with cash.
Before calculating ratios, write one sentence describing how the company makes money. That sentence gives every reported number a job: revenue measures demand, gross margin reflects product economics, working capital describes the operating cycle, and capital expenditure reveals what must be reinvested.
Trace profit into cash
A useful first check is whether operating cash flow broadly follows profit over several years. A single weak year can be ordinary; a persistent gap needs an explanation.
- Receivables growing faster than sales may indicate softer collections.
- Inventory growth can be preparation for demand—or evidence that demand disappointed.
- Repeatedly capitalised costs can make current profit look stronger.
Finish with financial resilience
Debt is best judged against the stability of cash generation, not through one universal threshold. Compare interest obligations, near-term maturities and liquidity with a conservative estimate of operating cash flow.