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Foundation · Business finance

Reading a business through its numbers: the three statements, cash and value

How the profit and loss statement, the balance sheet and the cash flow statement fit together, why profit is not cash, how working capital ties up money, what EBITDA hides, when a business earns more than its cost of capital, how to value it, and how to read a real company's annual results in ten minutes.

96 min8 lessons Facts checked against sources on
Start lesson 1 How the three statements link: one company through all three

Key takeaways

  • The P&L shows profit over a period, the balance sheet shows what a company owns and owes on one day, and the cash flow statement explains how the cash on one balance sheet became the cash on the next.
  • Profit follows accounting rules about when revenue and costs count; cash is what actually moved.
  • Turn working capital into days and you can see how long cash is tied up between paying suppliers and being paid by customers, and exactly how much cash each day saved would free.
  • EBITDA asks what the operations earn before the cost of the assets they use.
  • A business creates value only when the return it earns on the money invested in it is higher than the return its lenders and owners could expect elsewhere for the same risk.
By the end you will be able to
  • Follow one company through all three statements and show how they link
  • Read a cash flow statement and explain the gap between profit and cash
  • Turn working capital into days and calculate the cash freed by changing them
  • Explain the difference between EBITDA, operating profit and free cash flow
  • Compare return on invested capital with the cost of capital, and say whether growth creates value
  • Value a business with multiples and a simple DCF, judge a project with NPV, IRR and payback, and say when each misleads
  • Pull the five numbers that matter from a real annual results release

Lessons

1

How the three statements link: one company through all three

Follow a fictional furniture maker through one year: its profit, its cash, and the balance sheet at the start and the end.

12 min
2

The cash flow statement, and why profit is not cash

The three sections, the items that move profit but not cash, what the signs of each section tell you, and how much of its profit a company turns into cash.

11 min
3

Working capital in days: receivables, inventory, payables and the cash conversion cycle

Turn the balance sheet into days, find the cash freed by each day saved, see why growth eats cash, and meet a company whose suppliers fund it.

12 min
4

EBITDA versus operating profit versus free cash flow

Three measures, three different questions. Why two companies with the same EBITDA can produce very different cash, and how lease accounting lifts EBITDA.

11 min
5

Return on capital against its cost: ROIC and WACC in plain words

A business creates value only when it earns more on its capital than that capital costs. How to calculate both sides, and why growth can destroy value.

11 min
6

Valuation in practice: multiples, a simple DCF, NPV, IRR and payback

Value a company two ways, judge a project three ways, and know where each method misleads.

14 min
7

Reading a real results release: Inditex, FY2025

Open a real annual results release and pull out the five numbers that matter in ten minutes: growth, gross margin, operating margin, cash generated, and net cash.

13 min
8

Using this in a case: what to ask, what to calculate, what to say

Turn the finance ideas into a case answer: the questions that matter, the four calculations, a fully worked deal question, and a drill set with exact answers.

12 min

Worked cases in this module

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Key terms