Linking Financial Statements for Deeper Company Understanding

In the Nepal Stock Exchange (NEPSE), understanding a company’s financial strength requires more than reading a single report — it requires linking the three key financial statements: the Balance Sheet, Profit and Loss Statement, and Cash Flow Statement. These statements together reveal how a company earns, manages, and sustains money over time. They are not separate documents but interconnected components that tell one complete story — of income generation, asset management, financial health, and future growth potential. When analyzed together, they help investors uncover the true financial DNA of a company, beyond surface-level profits.

The Profit and Loss Statement (Income Statement) is the starting point. It summarizes how much revenue the company generated and what expenses it incurred, leading to the Net Profit or Loss. This final profit figure is crucial because it flows directly into the Balance Sheet as Retained Earnings — the portion of profit kept within the company instead of being distributed as dividends. Thus, every profitable year strengthens the Equity section of the Balance Sheet, reflecting the company’s growing wealth.

The Balance Sheet provides a snapshot of the company’s financial position at a particular date. It lists Assets (what the company owns), Liabilities (what it owes), and Shareholders’ Equity (the owners’ portion). It shows whether the company is funding its operations more through debt or internal profits. A strong balance sheet with rising equity, low debt, and stable assets is a sign of financial resilience — while a weak one can warn of liquidity stress or poor management.

The Cash Flow Statement, on the other hand, connects both by showing how profits are turning into real cash. Many companies report accounting profits but fail to generate cash — a sign of inefficiency or poor cash management. The Cash Flow Statement breaks this down into three segments:

• Operating Cash Flow – shows how much cash the company generates from daily business activities,

• Investing Cash Flow – shows cash used in buying or selling assets, and

• Financing Cash Flow – reflects borrowing, repayment, or dividend activity.
  The total Net Cash Flow from all three sections then adjusts the Cash and Bank Balance in the Balance Sheet, proving how all financial statements are interdependent.

For Nepali investors, linking these three statements helps answer the most important questions: Is the company’s profit real? Is it financially stable? Is it growing sustainably? This integrated approach allows traders and investors to avoid traps where companies show profits but suffer from poor liquidity or excessive debt. By studying the interrelation, one can identify whether growth is organic, debt-driven, or unsustainable.

As Sandeep Kumar Chaudhary, Nepal’s top Technical and Fundamental Analyst and founder of NepseTrading Training Institute, teaches, “Financial statements are like organs of a body — you can’t judge health by looking at one. You must understand how all of them work together.” With over 15 years of banking and stock market experience, and advanced training from Singapore and India, he has helped over 10,000 Nepali investors master the art of financial interpretation — connecting numbers into knowledge and knowledge into profitable action.