Every session so far has asked you to "research the company" at some point. This is the session that finally opens up what that actually means: three documents, three questions, and one number that quietly links all of them together.
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Back in Session 16, Activity Sheet 3 asked you to research a company and rate its financial health from 1 to 4. That's a genuinely useful exercise, but it quietly skipped a step: where do those numbers actually come from? A P/E ratio, a dividend yield, a "healthy" or "struggling" company, all of it traces back to three documents every public company is legally required to publish every quarter, and the numbers inside them.
These aren't three unrelated documents, either. They're wired together, a number computed on one literally becomes the starting point of another. Learn to see that wiring, and every "research the company" activity from here on stops being guesswork.
Tap a card to flip it and reveal the definition.
Picture a photograph, not a video. A balance sheet captures exactly what a company owns and owes at one precise moment, the last day of a quarter or a fiscal year, frozen. A week later it would already look slightly different.
Type in any three numbers for Assets, Liabilities, and Equity. Watch the scale.
Where the balance sheet freezes one instant, the income statement covers a whole stretch of time, a quarter, a year, and answers a different question entirely: how much did the company earn, and how much did it spend, along the way? Each line subtracts a little more, until what's left is net income, the number everyone means when they say a company "made" a certain amount of money.
"Operating Expenses" and "Non-Operating Items" sound vague on the diagram above. In a real filing, both get broken into specific line items. Here's a full worked example, a company with $1,000,000 in revenue, walked through every layer.
| Line | Amount | % of Revenue |
|---|---|---|
| Revenue | $1,000,000 | 100.00% |
| − Cost of Goods Sold | $600,000 | 60.00% |
| = Gross Profit | $400,000 | 40.00% |
| − Salaries & Wages | $120,000 | 12.00% |
| − Rent | $40,000 | 4.00% |
| − Marketing | $60,000 | 6.00% |
| − General & Administrative | $50,000 | 5.00% |
| − Sales Expenses | $30,000 | 3.00% |
| − Total Operating Expenses | $300,000 | 30.00% |
| = Operating Income | $100,000 | 10.00% |
| Interest Paid | $15,000 | 1.50% |
| − Interest Earned | $5,000 | 0.50% |
| − Net Interest Expense | $10,000 | 1.00% |
| = Pretax Income | $90,000 | 9.00% |
| − Taxes (22% rate) | $19,800 | 1.98% |
| = Net Income | $70,200 | 7.02% |
Operating Expenses cover the cost of running the business day to day, salaries, rent, marketing, admin, and sales costs, all things that would exist even with zero debt and zero tax obligations. Non-Operating Items are everything else: Net Interest Expense (what was paid to lenders, minus what was earned on cash sitting in the bank) and Taxes owed to the government. That distinction matters, it separates "how well does the core business run" from "how the company is financed and taxed."
Each margin below answers the same question at a different depth: of every dollar of revenue, how much survived to that point?
| Margin | Formula | This Example | What It Answers |
|---|---|---|---|
| Gross Margin | Gross Profit ÷ Revenue | $400,000 ÷ $1,000,000 = 40.0% | After the direct cost of the product itself, what's left? |
| Operating Margin | Operating Income ÷ Revenue | $100,000 ÷ $1,000,000 = 10.0% | After running the whole business, what's left? |
| Net Margin | Net Income ÷ Revenue | $70,200 ÷ $1,000,000 = 7.02% | After absolutely everything, debt, taxes, all of it, what's left? |
Suppose $25,000 of Depreciation & Amortization is buried inside this company's Cost of Goods Sold and Operating Expenses above.
| Starting Point | Formula | Result |
|---|---|---|
| From Operating Income | $100,000 + $25,000 (D&A) | $125,000 |
| From Net Income | $70,200 + $19,800 (tax) + $10,000 (net interest) + $25,000 (D&A) | $125,000 |
Both routes land on the same number, EBITDA doesn't care how you get there, only that interest, taxes, and D&A all get added back. EBITDA Margin here: $125,000 ÷ $1,000,000 = 12.5%.
That "% of Revenue" column threaded through the worked example above has a name: a common-size income statement, every line restated as a percentage of revenue instead of raw dollars. It's what lets you compare a $1,000,000 company to a $100,000,000,000 company on equal footing, or compare the same company to itself two years apart.
| Line | % of Revenue |
|---|---|
| Revenue | 100.00% |
| Cost of Goods Sold | 60.00% |
| Gross Profit | 40.00% |
| Salaries & Wages | 12.00% |
| Rent | 4.00% |
| Marketing | 6.00% |
| General & Administrative | 5.00% |
| Sales Expenses | 3.00% |
| Total Operating Expenses | 30.00% |
| Operating Income | 10.00% |
| Net Interest Expense | 1.00% |
| Pretax Income | 9.00% |
| Taxes | 1.98% |
| Net Income | 7.02% |
Set your own revenue and expenses and watch the bars step down to net income, with margins and EBITDA calculated live underneath.
Bar widths are scaled against Revenue, so you can see at a glance how much of every dollar makes it all the way down to Net Income.
Here's the wrinkle the income statement hides: a sale can count as revenue the moment it happens, even if the customer hasn't actually paid yet. Net income is a real, useful number, but it isn't the same thing as cash in the bank. The cash flow statement exists to answer exactly that: of everything that happened this period, how much was real, spendable cash?
Notice the first field below, it's not something you type in. It's pulled straight from the Income Statement simulator above, live. Adjust the numbers up there and watch it change down here.
Here's the payoff for everything above. These three statements aren't graded separately, they're wired together, and net income is the wire.
This year's Net Income from your Income Statement simulator above:
That figure adds directly to Retained Earnings, one of the components of Equity on the Balance Sheet, and it's also the opening line of the Cash Flow Statement, before being adjusted for the fact that not all of it arrived as actual cash yet. Three statements, one number, doing two jobs at once.
Zoom out one more level and the loop closes completely: whatever cash a company ends the year with becomes the Cash line item at the top of next year's Balance Sheet. The three statements don't just connect once, they hand off to each other in a cycle, year after year.
Session 3 introduced the P/E ratio. These three pull directly from the statements you just built, and each answers a different worry an investor might have.
Every number below comes straight from NIKE, Inc.'s own official fiscal 2025 results, released June 26, 2025 (fiscal year ended May 31, 2025), figures in millions of dollars. The layout is simplified, but nothing is rounded off or invented.
| Income Statement, FY2025 | |
|---|---|
| Revenue | $46,309 |
| − Cost of Sales | $26,519 |
| = Gross Profit | $19,790 |
| − Selling & Administrative Expense | $16,088 |
| ± Net Interest & Other Income | +$183 |
| = Income Before Taxes | $3,885 |
| − Income Tax Expense | $666 |
| = Net Income | $3,219 |
| Balance Sheet, as of May 31, 2025 | |
|---|---|
| Total Current Assets | $23,362 |
| Property, Plant & Equipment and Other Long-Term Assets | $13,217 |
| = Total Assets | $36,579 |
| Total Current Liabilities | $10,566 |
| Long-Term Debt & Other Long-Term Liabilities | $12,800 |
| Total Liabilities | $23,366 |
| + Shareholders' Equity | $13,213 |
| = Total Liabilities + Equity | $36,579 |
| Ratio | Calculation | Result |
|---|---|---|
| Gross Margin | $19,790 ÷ $46,309 | 42.7% |
| Net Profit Margin | $3,219 ÷ $46,309 | 7.0% |
| Current Ratio | $23,362 ÷ $10,566 | 2.21 |
| Debt-to-Equity | $23,366 ÷ $13,213 | 1.77 |
Source: NIKE, Inc. Reports Fiscal 2025 Fourth Quarter and Full Year Results, June 26, 2025. These are FY2025 figures; Nike reports new results every quarter, so check its investor relations page for anything more recent.
The Balance Sheet is a snapshot (Assets = Liabilities + Equity, always). The Income Statement is a video of earnings over time, ending in Net Income. The Cash Flow Statement checks how much of that was real cash.
Net Income is the thread that ties all three together: it's the last line of the Income Statement, it adds to Retained Earnings on the Balance Sheet, and it's the opening line of the Cash Flow Statement. Once you can see that thread, "research the company" stops being a black box.
Application: Pick a real company your team is watching. Pull up its most recent quarterly or annual report (most investor relations sites publish these for free) and find its Total Assets, Total Liabilities, and Equity. Confirm the identity balances, the way it did for Nike above.
Enrichment: For that same company, calculate all three ratios from this session, gross margin, current ratio, and debt-to-equity, and compare them to a competitor in the same industry. Which company looks financially stronger, and on what basis?