What you’ll learn

The accounting and finance you need to read earnings reports, balance sheets and financial metrics, and to tell a good investment from a bad one. 31 short chapters in five acts. One chapter in every act is free.

Act I

How a Business Works

01Revenue, expenses and profitFREEWhat revenue, expenses and profit (net income) are, and why a busy business can still lose money. Includes what does not count as revenue, such as a bank loan.02The accounting equationAssets = liabilities + equity: what a balance sheet shows and why it always balances, built for a small café.03Debits and creditsHow double-entry bookkeeping works: every transaction changes at least two accounts. Covers journal entries, debits, credits and accounts payable.04Accrual accountingWhy profit and cash differ: cash vs. accrual accounting, the matching principle, accounts receivable, deferred revenue and prepaid expenses.05Gross margin and business modelsHow different business models make money, what gross margin tells you, and why investors prize recurring revenue such as subscriptions.★Closing the books: a small-business caseCase study: close a month of a café’s books, from the opening balance sheet to the closing one, and explain to a banker why profit and cash differ.

Act II

The Three Statements

06How to read an income statementFREEThe income statement (P&L) line by line: revenue, cost of goods sold, gross profit, operating expenses, operating income and net income.07How to read a balance sheetA real company’s balance sheet: current vs. non-current items, retained earnings, and why most assets are carried at historical cost.08How to read a cash flow statementThe three sections of the cash flow statement (operating, investing, financing) and why operating cash flow is often the first number analysts check.09How the three financial statements connectHow net income flows into retained earnings and net cash flow into the cash balance: the links between the income statement, balance sheet and cash flow statement.10Depreciation and capexCapital expenditure, depreciation and amortization: why a new machine isn’t an expense on the day it’s paid for, and how its cost is spread over its useful life.11Working capitalWorking capital, and how changes in receivables, inventory and payables make operating cash flow differ from net income (the indirect method).★Three-statement model: a manufacturing caseCase study: from an opening balance sheet and a year of transactions, build a manufacturer’s income statement, cash flow statement and closing balance sheet.

Act III

Reading the Numbers

12Profit marginsFREEGross, operating and net margin, and how to compare them fairly: against the company’s own history and its direct competitors, not across industries.13Revenue growth and CAGRMeasuring growth: year-over-year growth, CAGR, the rule of 72, and organic growth vs. growth bought through acquisitions.14ROE, ROA and ROICReturn on equity, return on assets and return on invested capital, and why only returns above the cost of capital create value.15Liquidity and solvency ratiosWhether a company can survive a bad year: current and quick ratios, net debt, EBITDA and interest coverage.16The cash conversion cycleAsset turnover, days sales outstanding, days inventory outstanding and days payable outstanding, and the cash conversion cycle that combines them.17Quality of earningsHow repeatable a company’s profit is and how well it turns into cash: one-off items, adjusted earnings and the red flags analysts look for.★DuPont analysis: comparing two companiesCase study: a software company and a supermarket chain reach the same return on equity by very different routes. Break it down with DuPont analysis and operating leverage.

Act IV

Earnings Season

18How to read a 10-K and 10-QFREEThe anatomy of SEC filings: the 10-K, 10-Q and 8-K, the MD&A, footnotes and fiscal years, and where to find what.19EPS, dilution and buybacksEarnings per share, basic vs. diluted, and how share buybacks and stock-based compensation change what each share earns.20Earnings beats, misses and guidanceHow quarterly results are judged: consensus estimates, beats and misses, guidance, and why a stock can fall on good news that was already priced in.21Segment reporting and KPIsSegment reporting and the key metrics behind different business models: ARR, churn, net revenue retention, same-store sales and LTV/CAC.22GAAP vs. non-GAAP earningsGAAP vs. adjusted (non-GAAP) earnings: what companies add back, how to read the reconciliation, and when adjustments are a warning sign.★Reading an earnings release: a software caseCase study: read a software company’s quarterly release and earnings call, from the beat or miss against consensus to guidance, and decide what matters.

Act V

Good Investment, Bad Investment

23Time value of moneyFREEWhy a dollar today is worth more than a dollar later: compounding, present value and the discount rate.24Free cash flow and DCF valuationFree cash flow and discounted cash flow (DCF) valuation, including terminal value: estimating what a business is worth from the cash it will produce.25P/E and EV/EBITDA multiplesValuation multiples: market cap, enterprise value, the P/E ratio and EV/EBITDA, and how to spot a value trap.26Moats and margin of safetyCompetitive moats, risk, diversification and the margin of safety: telling a great company from a great investment.★Spotting accounting red flags: a final caseCase study: a hyped company’s pitch checked against its numbers, reading profit, cash, the balance sheet, returns and price in ten minutes.

Glossary of every term in the course →