Freedom Isn’t Free UK Personal Finance
Investing
How to Read Company Financial Statements (UK)
If you can't tell a profitable business from a story stock in two minutes, you're guessing in a suit. Five ratios do the work, and most retail investors never bother to learn them.
Five ratios that filter out bad businesses
| Ratio | Calculation | Good level |
|---|---|---|
| Return on Equity (ROE) | Net profit / shareholder equity | Above 15% consistently |
| Debt-to-equity | Total debt / equity | Below 0.5 (non-financials) |
| Operating margin | Operating profit / revenue | Widening over 5 years |
| Free cash flow yield | FCF / market cap | Above 5% |
| Interest cover | Operating profit / net interest | Above 4x |
Run any FTSE 100 candidate through these before deeper research.
Key takeaways
1
Learning how to read financial statements is the difference between buying a story and buying a business.
2
The three core statements (income statement, balance sheet, cash flow) each tell you something the others hide.
3
Five ratios do most of the work: ROE, debt-to-equity, operating margin, free cash flow yield, and interest cover.
4
Buffett-style red flags include heavy debt loads, weak gross margins, capex-hungry industries, and no pricing power.