Analyze financial statements for key ratios, cash flow positions, and taxation effects.

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Key Ratios: Key financial ratios include liquidity, profitability, and solvency. Liquidity ratios measure the ability of a company to meet its short-term obligations; they are generally expressed as current and quick ratios. Profitability ratios measure how efficiently a business is operating and generating income. These are usually expressed as gross margin, operating margin, return on assets (ROA), return on equity (ROE), and earnings per share (EPS). Solvency ratios capture how much debt a company has in relation to its total assets; these are commonly expressed as debt-to-assets ratio or long-term liabilities/equity ratio.

Cash Flow Position: A cash flow statement shows the amounts of money flowing into or out of the business from operations, investing activities, and financing activities over a period of time. Analyzing a cash flow statement helps investors understand how well the company is managing its resources and meeting current obligations.

Taxation Effects: Tax expenses reported on an income statement can be affected by changes in tax rates or legislation that affects companies’ taxable income levels. Companies must also consider state taxes when calculating their overall tax expense for any given period. Understanding taxation effects on nets profits can help investors assess the effectiveness of management’s decisions with respect to taxation strategies, such as utilizing available credits or deductions.