Begin with the business
Before reviewing numbers, write one sentence describing how the company makes money. The financial statements only become useful when connected to customers, products and competitive advantage.
Read in four passes
Use the same sequence every quarter so important changes are easier to spot.
- Revenue: Is demand growing, and what is driving it?
- Margins: Is each dollar of sales becoming more or less profitable?
- Cash flow: Are reported profits turning into cash?
- Guidance: What does management expect next, and why?
Compare, do not isolate
One number rarely tells the full story. Compare results with the prior year, the prior quarter, management guidance and analyst expectations. Then investigate the reason for material differences.
Listen for quality
Management commentary should explain both strengths and weaknesses. Watch for changing definitions, excessive focus on adjusted measures or explanations that do not match the underlying figures.