Value Investing: Financial Statements Beginners Guide

Buy the steak not the sizzle!

Benjamin Graham, the father of value investing and tutor of Warren Buffet, is famous for saying buy the steak not the sizzle. Simply put Graham, Buffet and most other value investors invest in a business based on its fundamentals and try to ignore rumours and speculation. As quoted by Benjamin Graham, “to achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

What is value investing?

Value investing is the concept of buying stocks or securities at an under priced value based on a chosen form to fundamental analysis. It was originally derived from the ideas of Benjamin Graham and David Dodd.

In order to understand the fundamentals of a business, value investors analyse a lot of different reports. The most important of these are the businesses’ financial statements.

What are financial statements?

Financial statements provide an accurate and concise picture of a company’s condition and operating results.

There are three main financial statements:

  1. Balance Sheet
  2. Income Statement
  3. Cash Flow Statement

Balance Sheet

A balance sheet shows how much the business has and how much it owes at a point in time.

Read our Balance Sheet Beginners Guide

Income Statement

The Income Statement also referred to as a Profit and Loss (P&L) Statement summarizes the income a business receives, the expenses it pays (including taxes) and shows the overall profit or loss for a period of time.

Read our Income Statement Beginners Guide

Cash Flow Statement

A cash-flow statement shows where cash comes from and where cash goes. It gives insight into a business’ different activities such as normal operations, buying and selling assets, and borrowing or repaying loans.

Read our Cash Flow Statement Beginners Guide