Non-finance MBA students often reach the financial analysis section of a case study and feel a sudden, sharp anxiety. The three core financial statements — income statement, balance sheet, and cash flow statement — each tell a different part of the business story, and you need all three to assess a firm's health accurately.
The Income Statement: Is the Business Profitable?
The income statement (also called the Profit and Loss or P&L) reports revenue, costs, and profit over a period. Reading from top to bottom:
- Revenue (Turnover): Total sales before any costs
- Gross Profit = Revenue − Cost of Goods Sold (COGS): What's left after direct production costs
- EBITDA: Earnings Before Interest, Tax, Depreciation, and Amortisation — often used to compare operational profitability across firms
- Operating Profit (EBIT): After overhead costs but before interest and tax
- Net Profit: The bottom line after all costs, interest, and tax
The Balance Sheet: What Does the Business Own and Owe?
The balance sheet shows what the company owns (assets), what it owes (liabilities), and what remains for shareholders (equity) at a single point in time. The fundamental equation: Assets = Liabilities + Equity.
- Current Assets: Cash, inventory, receivables — expected to convert to cash within 12 months
- Non-Current Assets: Property, plant, equipment, intangibles
- Current Liabilities: Payables, short-term debt — due within 12 months
- Working Capital = Current Assets − Current Liabilities: Positive is healthy; negative indicates liquidity risk
The Cash Flow Statement: Does the Business Generate Real Cash?
A company can be profitable on paper but run out of cash. The cash flow statement shows actual cash inflows and outflows, divided into: Operating (from core business), Investing (asset purchases/sales), and Financing (debt, equity, dividends). A healthy business should generate positive operating cash flow consistently.
Key Ratios for MBA Case Analysis
- Gross Margin = Gross Profit / Revenue × 100% — pricing power and cost efficiency
- Current Ratio = Current Assets / Current Liabilities — short-term solvency (above 1.5 is generally healthy)
- Debt-to-Equity = Total Debt / Total Equity — financial leverage (higher = more risk)
- Return on Equity (ROE) = Net Profit / Shareholders' Equity × 100% — how efficiently equity generates profit