Financial Statements Explained: How to Read & Analyze Financial Statements for NEPSE Investing

Financial statements are among the most important tools investors use to understand the financial health, profitability, debt position, cash flow, and overall performance of a company.

For investors in the Nepal Stock Exchange (NEPSE), learning how to analyze financial statements can help you move beyond rumors and market hype and make investment decisions based on actual business performance.

If you want to develop practical skills in fundamental analysis, technical analysis, and NEPSE investing, Sarbaguna provides professional Share Market Training in Nepal for beginners as well as active investors.

What Are Financial Statements?

Financial statements are formal reports that summarize a company's financial position and business performance.

They help investors answer important questions such as:

• Is the company profitable?
• Is revenue growing?
• How much debt does the company have?
• Does the company generate healthy cash flow?
• Is shareholders' equity increasing?
• Is the company's financial position improving or weakening?

For NEPSE investors, financial statements can be particularly useful when comparing companies within sectors such as commercial banks, development banks, finance companies, hydropower, insurance, microfinance, manufacturing, hotels, and investment companies.

4 Main Types of Financial Statements

1. Balance Sheet

A balance sheet provides a snapshot of a company's financial position at a particular date.

The basic accounting equation is:

Assets = Liabilities + Shareholders' Equity

Assets

Assets are resources owned or controlled by the company.

Examples include:

• Cash and bank balances
• Investments
• Accounts receivable
• Inventory
• Property
• Buildings
• Machinery and equipment
• Other financial assets

Increasing assets can be positive, but investors should always investigate how those assets are financed and whether they generate sufficient returns.

Liabilities

Liabilities represent financial obligations owed by the company.

Examples include:

• Short-term borrowings
• Accounts payable
• Long-term loans
• Bonds and debentures
• Lease obligations
• Other outstanding liabilities

High liabilities are not automatically negative. Investors should compare debt with the company's earnings, assets, equity, and ability to generate cash.

Shareholders' Equity

Shareholders' equity broadly represents the residual interest belonging to shareholders after liabilities are deducted from assets.

It may include:

• Share capital
• Reserves
• Retained earnings
• Other components of equity

Growth in equity over several reporting periods may indicate improving financial strength, although investors should examine what caused the increase.

2. Income Statement

The income statement—often called the profit and loss statement—shows the company's financial performance during a particular period.

Important figures include:

Revenue → Expenses → Operating Profit → Net Profit

For investors analyzing NEPSE companies, some important areas to examine include:

• Revenue or operating income growth
• Operating expenses
• Finance costs
• Operating profit
• Profit before tax
• Net profit
• Earnings per share (EPS)

Why Net Profit Matters

Net profit represents the earnings remaining after relevant expenses and taxes.

Instead of looking at one quarter alone, investors should compare profitability across several quarters and financial years.

A company showing consistent improvement may deserve further analysis.

However:

Higher profit does not automatically mean the stock is undervalued.

Valuation must also be considered.

3. Cash Flow Statement

Profit and cash are not always the same.

That is why investors should also study the cash flow statement.

Cash flows are generally grouped into:

Operating Activities

Cash generated or used through the company's main business operations.

Strong and sustainable operating cash flow can be an encouraging sign because it indicates that the underlying business is producing cash.

Investing Activities

This includes cash associated with activities such as purchasing or selling long-term assets and investments.

Large investing outflows are not necessarily bad if the company is investing productively for future growth.

Financing Activities

These include activities involving:

• Borrowing
• Loan repayment
• Share issuance
• Dividend payments
• Other financing transactions

Analyzing these movements helps investors understand how a company finances its operations and expansion.

4. Statement of Changes in Equity

This statement explains how shareholders' equity changed during the reporting period.

Changes may result from:

• Net profit or loss
• Dividend distribution
• New share issuance
• Reserves
• Retained earnings
• Other equity adjustments

For long-term NEPSE investors, understanding changes in shareholders' equity can provide additional insight into how the company's underlying financial position is evolving.

How to Analyze Financial Statements for NEPSE Stocks

Reading the numbers is only the first step. Investors should learn how to interpret them.

Step 1: Compare Revenue Growth

Check whether revenue or operating income has increased consistently.

Compare:

Quarter vs. Quarter | Year vs. Year | Company vs. Sector

Step 2: Analyze Profit Growth

Look at whether net profit is increasing sustainably.

One-time income can temporarily increase profits, so investors should understand where the profit came from.

Step 3: Check EPS

Earnings Per Share (EPS) shows how much profit is attributable to each share.

A simplified formula is:

EPS = Earnings Available to Common Shareholders ÷ Weighted Average Shares Outstanding

Higher EPS can be positive, but EPS should be analyzed together with growth, valuation, business quality, and sustainability.

Step 4: Study Book Value

Book value provides information about the accounting value attributable to shareholders.

NEPSE investors frequently compare market price with book value using the Price-to-Book (P/B) ratio.

Step 5: Analyze P/E Ratio

The Price-to-Earnings (P/E) ratio compares the market price of a stock with its earnings.

P/E Ratio = Market Price Per Share ÷ EPS

A low P/E does not automatically mean a stock is cheap, while a high P/E does not automatically mean it is expensive.

Growth prospects, earnings quality, risk, sector characteristics, and market expectations must also be considered.

Step 6: Examine Debt

Check whether debt is increasing faster than earnings and equity.

Excessive debt may increase financial risk, particularly when interest expenses rise or business conditions weaken.

Step 7: Examine Cash Flow

A company can report accounting profits while experiencing weak cash generation.

Therefore, investors should compare:

Net Profit vs. Operating Cash Flow

Large and persistent differences deserve further investigation.

Financial Statement Analysis for NEPSE Investors

A good fundamental investor should avoid making decisions based on a single financial ratio.

Instead, combine multiple indicators such as:

Revenue Growth + Profit Growth + EPS + Book Value + ROE + Debt + Cash Flow + Valuation + Future Growth Potential

You should also compare companies operating within similar industries.

For example, directly comparing the financial ratios of a commercial bank with a hydropower company may provide misleading conclusions because their business models, capital structures, and accounting characteristics differ.

Limitations of Financial Statements

Financial statements are extremely useful, but they have limitations.

They primarily describe historical financial performance and position. They may not fully capture factors such as:

• Future industry changes
• Management quality
• Competitive advantages
• Investor sentiment
• Regulatory changes
• Macroeconomic conditions
• Interest-rate movements
• Political or economic risks
• Future business opportunities

This is why serious investors often combine fundamental analysis with industry research, valuation, risk management, and technical analysis.

Learn Financial Statement Analysis & Share Market Training in Nepal

Want to understand how professional investors analyze NEPSE-listed companies?

At Sarbaguna, investors can learn practical concepts related to:

• NEPSE Fundamental Analysis
• Financial Statement Analysis
• Technical Analysis
• Candlestick Analysis
• Price Action
• Support & Resistance
• Risk Management
• Portfolio Management
• Stock Selection
• Trading & Investment Strategies

Share Market Training Nepal – Sarbaguna

Learn how to analyze companies instead of depending only on tips and market rumors.

Trainer/Contact: Deep Thapa
Call / WhatsApp: 9849290806
Website: https://sarbaguna.com/

Frequently Asked Questions (FAQ)

What are financial statements?

Financial statements are structured financial reports showing a company's financial position, profitability, cash flows, and changes in shareholders' equity.

What are the four major financial statements?

The four major financial statements are the balance sheet, income statement, cash flow statement, and statement of changes in shareholders' equity.

Why should NEPSE investors study financial statements?

Financial statements help NEPSE investors evaluate profitability, debt, assets, cash generation, earnings, equity, and other factors before making investment decisions.

Which financial ratios are important for NEPSE investors?

Commonly analyzed indicators include EPS, P/E ratio, P/B ratio, ROE, debt ratios, profit margins, revenue growth, profit growth, and cash-flow measures. The appropriate ratios vary by sector.

Is EPS enough to select a good NEPSE stock?

No. EPS should be analyzed alongside earnings sustainability, growth, valuation, book value, cash flow, debt, business quality, industry conditions, and other relevant factors.

Where can I learn fundamental analysis in Nepal?

Sarbaguna provides share market training in Nepal covering fundamental analysis, technical analysis, financial statement analysis, stock selection, risk management, and practical NEPSE investing concepts.