Understanding Financial Statements of Listed Companies

Every NEPSE-listed company is required to disclose quarterly and annual financial statements. Almost no retail investor reads them. That's an enormous edge sitting in plain sight — and the bar to becoming one of the few who do read them is genuinely low. This article teaches you to read the three core statements in the order that maximises insight per minute spent.

We'll assume zero accounting background. By the end, you should be able to open any quarterly filing on NEPSE's website and within 20 minutes form a coherent view of whether the company is growing, profitable, and solvent.

The three statements and why they exist

Companies report three statements because each answers a different question:

• Income statement — did the company make money during the period?
• Balance sheet — what does the company own and owe right now?
• Cash flow statement — where did the cash actually come from and go to?

All three are required because accounting profit (income statement) and cash (cash flow) are not the same thing. A company can report a profit while running out of cash, or burn cash for years while building real underlying value. You need all three to get the full picture.

1. Income statement — top to bottom

Revenue (top line)

Revenue — or 'sales', or for banks, 'interest income' — is what the company billed for in the period. Growth here is the most-watched single number on the statement. Year-over-year comparisons are more meaningful than quarter-over-quarter (which is contaminated by seasonality). Three consecutive quarters of double-digit YoY revenue growth in a non-banking company is the cleanest green flag fundamental analysis offers.

Cost of goods sold and gross profit

Gross profit = revenue − cost of goods sold. The gross margin (gross profit / revenue) tells you how much pricing power the company has. A widening gross margin in a competitive industry is a sign of operational excellence or pricing leverage. A narrowing margin while revenue grows is a sign the company is buying revenue at someone else's expense — sometimes its own.

Operating expenses and operating profit

Below gross profit come operating expenses: salaries, rent, marketing, depreciation. Operating profit (EBIT) is what the company earns from running its core business, before financing and tax. Operating margin trend is more important than its absolute level — a company whose operating margin expands as revenue grows is showing operating leverage, which compounds.

Interest, tax, and net profit

Net profit after tax (the famous 'bottom line') ties to EPS, which ties to P/E. But it's the most manipulated number on the statement — interest, tax, and one-off items all sit between operating profit and net profit. Always check whether a profit jump is from genuine operating improvement or from a tax benefit, an asset sale, or a refinancing gain.

2. Balance sheet — assets, liabilities, equity

The balance sheet is a snapshot — at a single date — of everything the company owns (assets) and everything it owes (liabilities). The difference is equity: what belongs to shareholders. The fundamental identity is Assets = Liabilities + Equity.

Current vs non-current

Both sides split into current (within a year) and non-current (longer). The most-watched derivative metric is the current ratio = current assets / current liabilities. A current ratio above 1.5 is comfortable; below 1.0 is a liquidity warning.

Working capital

Working capital = current assets − current liabilities. A company whose working capital ballooned while revenue stayed flat is tying cash up in receivables or inventory — bad. A company that grew revenue while keeping working capital lean is recycling capital efficiently — good.

Debt and equity

Long-term debt and equity together fund the long-term assets. The debt-to-equity ratio (D/E) measures leverage. For a manufacturing company, D/E under 1.0 is conservative; for an infrastructure or hydropower company with stable cash flows, D/E of 2.0+ may be entirely sustainable. There's no single 'correct' D/E — only D/E that matches the cash-flow profile.

Book value per share

BVPS = equity / shares outstanding. Combined with the market price, you get P/B. A P/B below 1 means the market thinks the company is worth less than its accounting equity — sometimes deserved (impaired assets, structural losses), sometimes a bargain.

3. Cash flow statement — where cash really moved

The cash flow statement reconciles net profit back to actual cash movements. It splits into three sections.

Operating cash flow (OCF)

Cash generated by running the business — the most important section. A healthy company has OCF that consistently exceeds net profit (because depreciation and non-cash items get added back). A company whose OCF is persistently below net profit is the single biggest red flag in fundamental analysis — it usually means the 'profits' are accounting profits not backed by collected cash.

Investing cash flow

Cash spent on capital expenditure, acquisitions, or invested in other assets — and proceeds from selling those things. Capital expenditure as a share of OCF tells you how reinvestment-heavy the business is. Asset-light businesses convert most OCF to free cash; capex-heavy businesses (hydropower, hotels, manufacturing) keep reinvesting.

Financing cash flow

Cash from issuing or repaying debt, issuing or buying back shares, and paying dividends. A company that pays dividends from financing cash flow rather than operating cash flow is borrowing to pay shareholders — sustainable only briefly.

Free cash flow

FCF = OCF − capex. The single most important derived number in fundamental analysis. FCF is what's actually available for dividends, buybacks, debt paydown, or further reinvestment. A company with consistent positive FCF growing in line with revenue is, by definition, creating value.

The 20-minute checklist

Open any quarterly. In order:

1. Revenue YoY growth — positive and accelerating? Decelerating? Negative?
2. Gross margin and operating margin — direction over the last 4 quarters.
3. Net profit composition — driven by operating profit or by other income?
4. Current ratio and working capital trend.
5. D/E and absolute debt change — adding or paying down?
6. OCF vs net profit — converging or diverging?
7. Capex direction — increasing investment or harvesting?
8. Dividend coverage — paid from FCF or from financing?
9. Cross-check the EPS to the stock price → P/E. Cross-check BVPS to price → P/B.
10. One concluding sentence: is this company healthier, the same, or worse than a year ago?

Red flags worth memorising

• Revenue growing but receivables growing faster — sales without collections.
• Inventory turnover slowing — products sitting on the shelf.
• Operating cash flow persistently below reported profit — earnings quality concern.
• Frequent equity issuance for working-capital needs — operational shortfall.
• Sharp jump in 'other income' or one-off gains — unrepeatable.
• Auditor qualification or change of auditor — investigate before any other analysis.

Green flags worth recognising

• Operating margin expansion while revenue grows double-digit YoY.
• FCF growing as fast as or faster than reported earnings.
• Reducing share count via buyback (rare in Nepal) or stable count.
• Working capital shrinking relative to revenue — capital-efficient growth.
• Dividend funded entirely by FCF with payout ratio under 60%.

Putting it to work

Pick three NEPSE-listed companies in different sectors. Open their latest quarterly. Run the 20-minute checklist on each. Rank them. Compare your ranking to what the market is paying via P/E and P/B. The gap between fundamental quality and market pricing is where return comes from.

Read enough of these and the patterns become recognisable in five minutes, not twenty. That's the goal — pattern recognition built on careful first reads.