How to Read Financial Reports

In this article we discuss:

• What Are Financial Reports?
• What Are the 3 Main Financial Statements?
• Understanding Notes for Report Context
• Key Report Ratios and Metrics
• Reading Financial Reports With a Strategic Lens

Leaders in every business area need the ability to analyze financial health and performance. Financials shape decisions about hiring, budgets, investments, and how operations run, and a solid grasp of financial reports ensures those decisions are fully informed.

Financial fluency also strengthens partnership with CFOs and finance teams, who are increasingly relying on non-financial data to understand performance and support the business as a whole.

Loran Armstrong, chief operating officer at Rockwell Capital Group, recalled working with a retailer struggling to manage cash flow during the holidays. By analyzing financial data, they discovered the business was overcommitting to inventory without a reliable sales forecast. 

“After revising their financial approach and creating a more accurate forecasting model, we helped them better align their purchasing with actual demand,” Armstrong wrote. “This not only stabilized their cash flow but also resulted in greater profitability during peak periods.”

Modern reporting tools have made financial data easier to access and interpret for leaders outside of the finance function. As a result, knowing how to read financial reports is no longer reserved for finance roles but is a baseline expectation for anyone guiding the organization at a high level.

What Are Financial Reports?

Financial reports are formal records showing a company’s financial performance and position over a specific period. They include documents like annual reports and SEC filings, and supporting critical decisions for:

• Executives use financial reports to understand the organization’s capacity and direction. This insight helps determine when to advance growth initiatives, reinforce the cost base, or shift resources to protect long-term stability.
• Investors and analysts rely on financial reporting to judge whether a company can create durable value. Reports reveal the strength of the business model, the discipline of leadership, and the ability to navigate market pressure over time.
• Lenders review financial statements to evaluate liquidity and the reliability of cash flows. These metrics influence lending decisions and shape credit access and terms that reflect financial position and risk profile.
• Internal business leaders (HR, operations, product) use financial data to align workforce plans, operational requirements, and product investments with performance realities. This ties day-to-day execution to financial outcomes and supports sustainable growth across teams.

When leaders fully understand financial reports, they gain context behind day-to-day performance rather than reacting to outcomes that have already occurred. Financial reporting becomes a practical lens for spotting operational pressure points, validating investments, and understanding where the business has room to grow.

What Are the 3 Main Financial Statements?

Financial reporting relies on a set of core statements that work together to show the condition of the business: the balance sheet, the income statement, and the cash flow statement. Each statement highlights a different element of financial activity, and reviewing them together creates a grounded, holistic view of the organization’s financial position and direction.

1. Balance Sheet

The balance sheet shows what the company owns, what it owes, and the value that belongs to its owners at a specific point in time. It answers a simple question: Does the business currently have the financial strength to operate and invest with confidence?

A balance sheet includes three main categories:

• Assets: Resources the company controls and can use to run the business or support growth, such as cash, receivables, inventory, equipment, and property
• Liabilities: Financial obligations the company must pay, like supplier bills, loan balances, lease commitments, and other debts due in the near future or over time
• Equity: The portion of the business owned by shareholders after obligations are covered, which builds over time when the company earns and retains profit

A strong balance sheet signals high capacity to invest, withstand slower periods, and pursue new opportunities. A strained balance sheet, on the other hand, limits choices and increases financial risks in the future, especially in the case of unexpected hardship.

Practical tip: If you see high debt and low cash or a heavy concentration in intangible assets, review recent strategic decisions and future commitments to assess stability.

2. Income Statement

The income statement (also called profit and loss statement) shows how the business performed over a defined period by tracking its revenue and expenses. It reveals how efficiently the company converts revenue into profit and whether results reflect healthy demand or careful spending.

Key components of the income statement:

• Revenue: Income from core business activities
• Cost of goods sold: Direct costs tied to delivering goods or services
• Gross profit: Revenue minus direct costs
• Operating expenses: Costs of running the business
• Operating income and net income: Profit before and after certain expenses

Reviewing results across periods reveals trends in margins, pricing discipline, and cost control. Pay attention to one-time events or irregular gains and losses that can obscure underlying performance.

Practical tip: Tie changes in operating expenses to hiring pace and productivity to ensure growth aligns with capacity and cost structure.

3. Cash Flow Statement

The cash flow statement shows how cash enters and leaves the business across operating, investing, and financing activities. It answers the question: Does the organization generate enough cash to fund operations and meet obligations?

Key components of the cash flow statement:

• Operating cash flow: Cash generated by core operating activities
• Investing cash flow: Cash spent on infrastructure, assets, or acquisitions
• Financing cash flow: Cash raised from or returned to investors and lenders

Healthy operating cash flow supports reinvestment and resilience. Weak cash flow may indicate working-capital pressure, delayed collections, or overreliance on outside funding.

Practical tip: If profits rise but cash declines, look at receivables, payables, and inventory to understand where and why cash is being tied up.

Understanding Notes for Report Context

Notes to financial statements are supplementary details that explain the methods and assumptions used to prepare the reported results. They show how the numbers were developed and provide information that’s not always visible in the primary statements. This context includes accounting policies, estimates, and outside obligations that could affect future performance.

For leaders, this context matters. Two companies can report similar revenue and profit yet carry very different risk profiles based on the policies they apply and the obligations they carry. The notes help distinguish between genuine strength and growth supported by optimistic assumptions or temporary factors.

What to review in the notes:

• Accounting policies: How revenue is recognized, how assets are valued, and when costs are capitalized

• Contingencies and commitments: Legal matters and future obligations

• Goodwill and intangibles: Value tied to acquisitions or intellectual property

• Off-balance-sheet arrangements: Leases or financing structures that are not recorded as liabilities

Understanding these details helps leaders see where uncertainty exists and how conservative or aggressive reporting choices may be. This perspective supports better decisions about performance quality and future risk.

Key Report Ratios and Metrics

Financial ratios compare numbers in the statements to reveal patterns that raw figures cannot show. They help leaders confirm whether performance is sound and whether financial decisions are strengthening or weakening the business over time. 

These are some of the most common ratios teams use to analyze underlying momentum and true financial health.

Liquidity: Current Ratio

Liquidity explains whether a company can meet near term obligations with assets that are expected to turn into cash soon. The current ratio compares resources on hand with bills coming due.

Formula: current assets ÷ current liabilities

What moves it: Faster collections of receivables, leaner inventory, or longer supplier terms lift the ratio. Slow collections, inventory build ups, or shorter supplier terms reduce it. Losses that erode cash also weaken liquidity.

How to read it: Track the ratio over several periods and compare with peers in the same industry. A very low ratio can signal payment strain and potential service disruption. A very high ratio can signal idle working capital that could be redeployed to growth or returned to investors.

Solvency: Debt to Equity

Solvency reflects how a company funds its assets and how much financial pressure sits with owners versus lenders. Debt to equity is the primary ratio used to assess solvency by comparing total borrowing to the capital supplied by shareholders.

Formula: total debt ÷ shareholder equity

What moves it: New borrowing increases the ratio. Retained earnings and equity raises reduce it. Losses reduce equity and can push the ratio higher even without new debt.

How to read it: Evaluate the trend alongside earnings stability and cash inflow. Leverage rising while cash weakens puts pressure on the business and limits flexibility. A steady or declining ratio paired with improving earnings signals a stronger position and more capacity to invest.

Profitability: Gross Margin and Net Margin

Profitability reflects how much revenue turns into income. Gross margin and net margin are the primary measures. Gross margin shows how much remains after direct production and delivery costs. Net margin shows what remains after all expenses and financing decisions.

Formulas: Gross margin = gross profit ÷ revenue

Net margin = net income ÷ revenue

What moves them: Gross margin is influenced by pricing, product mix, and input costs. Net margin is shaped by operating discipline, staffing and compensation decisions, marketing levels, interest expense, and taxes.

How to read it: Track the trend and tie changes back to the underlying drivers. Rising gross margin while operating spending stays steady signals stronger unit economics. A declining net margin with a steady gross margin often reflects growing overhead or higher financing costs.

Efficiency: Asset Turnover

Efficiency reflects how effectively a company uses its assets to generate revenue. Asset turnover is the key measure, showing how much revenue the business produces for each dollar invested in its asset base.

Formula: revenue ÷ total assets

What moves it: Faster sales cycles, higher utilization, or divesting idle assets increase turnover. Large capital projects, inventory build, or slower volume reduce it.

How to read it: Consider turnover together with margins to understand the business model. High turnover with lower margins can still create strong returns if costs are tightly managed. Low turnover requires stronger margins to justify the asset base; otherwise it may signal excess capacity or underused investments.

Reading Financial Reports With a Strategic Lens

Financial reports matter most when they guide action. A strategic review looks past the surface and tests whether current performance can support future plans, manage exposure, and build capability for what comes next.

This lens connects the statements to understand the strength of the underlying business engine. For example, rising revenue with slowing operating cash can reflect slower collections or spending ahead of demand. Growth in intangible assets without improvement in income can reflect investment that still needs workforce support or operating alignment before it contributes.

When applying this view, use questions such as:

• Are patterns consistent across statements, or do they rely on timing or working-capital stretch?

• Do the notes reveal shifts in exposure or accounting treatment that require planning or capability changes?

• Which lines directly relate to your remit, such as hiring, compensation, technology, vendor spend, or productivity?

• Is the operating model evolving faster than skills, processes, or structure?

A useful habit is linking each statement to indicators that matter for your function, then translating those signals into decisions. This turns reporting into a tool for planning and operational discipline. Over time, statements start to feel less like formal documents and more like a continual reference point for understanding how the business is moving and where it can go next.

Finance leaders are facing increased expectations from both internal and external stakeholders. Download this report to uncover the top five reasons CFOs are moving to Workday to optimize their finance operations.