Many enter the market with big hopes to beat the odds and be successful in the long run, but they’re approaching things the wrong way. Colorful charts and candlesticks suck foolish investors in and make them think they need to recognize patterns in order to make profits, but that alone can’t be it. You must raise your probability of success using financial analytics and information, while also applying general technical analysis to your trades.
He with the most information wins...rather than staring at charts for hours, you should consider studying the three financial statements:
- Income Statement
- Balance sheet
- Cash Flow
Why study these? Because you have to remember that at the end of the day, the stock market is about buying good businesses, not buying candles.
Income Statement:
This will show you many numbers, but there are two key elements to watch, revenue and net income. Revenue is the sum of all sales the business makes during a specified quarter or annually. And net income is all that’s left in profit after taxes are paid. You don’t have to be a genius to see patterns in these numbers if you’re looking at a specific period’s performance compared to previous quarters or years. If sales are growing and profits are catching up, you may just have a good business. This automatically increases the probability of the stock moving in a bullish direction.
For “up and coming” companies that are still in their early phase of production, profits are not as important as revenue growth. Revenue shows whether a business is capable of generating demand for its product or service, while profits can take years to materialize. For example, Tesla didn’t actually post any profits until 2020, yet it was already generating nearly $25 billion in annual sales in the years leading up to that milestone.
This is a common path for high growth companies. Many will intentionally reinvest most of their revenue back into the business, whether that’s in research and development, scaling production, or building out sales and distribution networks. The end result is often a loss on the bottom line in the short term, but it sets the foundation for long term growth and competitive dominance.
In fact, investors often view aggressive reinvestment as a healthy sign that management is prioritizing expansion over short term profitability. The logic is simple: if the company can capture market share early and establish itself as a leader, the profits will come later once scale is achieved and costs begin to stabilize. This dynamic is why Wall Street tends to place so much weight on revenue growth, customer adoption, and total market opportunity when evaluating early stage companies.
Balance Sheet:
This is where you can see if the company has any positive equity or not. In general, you want a business to have more assets than liabilities, because that shows it owns more than it owes. Assets are the resources a company uses to operate and grow, and they can come in the form of cash, accounts receivable (money owed to the company), inventory, property, equipment, or even intangible assets like patents and trademarks.
Liabilities, on the other hand, represent what the company owes, things like loans, bonds, accounts payable (money it owes suppliers), lease obligations, or other forms of debt
Equity is simply the difference between the two: Assets – Liabilities = Equity. Positive equity means the company has a buffer of value left over for shareholders after all debts are paid. Negative equity is a red flag, because it indicates liabilities outweigh assets, which can suggest financial stress.
When analyzing a balance sheet, you’re essentially checking how solid the company’s foundation is, whether it’s built on ownership of real value, or weighed down by too much debt.
Free Cash Flow:
When all is said and done, the most important question for investors is…after covering all expenses and necessary investments, how much cash is left over? That number is called free cash flow (FCF). It’s essentially the money a company has available once it’s paid for operating costs and capital expenditures (like new equipment, facilities, or technology).
Free cash flow matters because it shows the company’s true financial flexibility. A business with strong FCF can pay dividends, buy back shares, pay down debt, or reinvest in growth, all without relying on outside funding. For mature companies, healthy and consistent free cash flow is often a sign of stability and the ability to reward shareholders over time.
For high-growth companies, free cash flow is equally critical. Even if they’re not posting profits on the income statement, positive FCF signals that their business model is generating enough excess cash to support expansion and future profitability. On the flip side, if a company consistently burns through cash without producing free cash flow, it may need to raise capital through debt or equity, which can dilute shareholders or increase financial risk.
Ultimately, free cash flow is one of the clearest measures of a company’s long-term health because, unlike accounting earnings, it can’t be easily manipulated. Cash is either there, or it isn’t.
The Final Result:
When you combine the balance sheet, income statement, and cash flow statement, you get a clear picture of how well a business is performing and how strong its foundation is. From there, smart investors look at future projections to see if growth is expected to continue.
This is also where valuation matters. Even a great company can be a bad investment if you pay too much. Investors often use ratios like price-to-earnings (P/E), price-to-sales (P/S), price-to-book, or enterprise value-to-EBITDA to judge if a stock is fairly priced.
It’s equally important to compare a company against its peers. If one stock trades at a discount while showing similar or better growth, it may be undervalued. If it trades at a premium without stronger prospects, it could be overpriced.
By tying financial health, growth outlook, and valuation together, investors can decide if a stock is truly worth buying. Combine all these factors with technical analysis and charting skills, you now not only WHAT to buy, but also know WHEN to buy…based on both valuations, fundamentals, and technicals.