For US stock investors, corporate financial statements are generally considered a must-read.

At the 1996 Annual Meeting， Warren Buffett once said, "Over the years, I have found reading a lot of reports to be quite useful in terms of making business decisions."

Why do financial reports fascinate Buffett so much?

Financial statements are critical to stock investors for three major reasons.

First, they reflect a company's business model.

You'll learn the basics about a company in its financial statements.

For example, earnings reports will tell you what products and services the company provides, who its customers are, and how it reaches them.

Such information is vital to understanding a company's business model.

Second, help find quality companies.

Many big-name companies are listed on the US stock market, such as Apple, Amazon, Google, and Coca-Cola.

Their growth over the years has been reflected in their historical financial statements.

And if you want to forecast their future performance, analyzing their earnings reports is also key.

In addition to companies that have already set themselves apart, we may also find companies with excellent growth potential by analyzing their financial statements.

Third, help avoid risky companies.

There have been some famous financial fraud cases in US history, causing significant losses to stock investors. In hindsight, we might find some traces of misconduct in the financial statements of some of the fraud cases.

In addition, worse-than-expected financial reports may indicate a company's bleak outlook, so it could be an investment to avoid.

You have a better probability of avoiding such a company by looking through its financial statements.

How to analyze a company's financial statements?

There are usually three ways to evaluate people's financial position: by looking at their earning power, assets and debts, or bank transactions.

When assessing a company's financial position, the information above can be found in its income statement, balance sheet, and cash flow statement, respectively.

Let's look at the first report, the income statement.

This financial statement records a company's revenue and expenses and calculates its net profit or loss during a fiscal period.

Based on this information, we'll get the company's profit margin, its revenue and profit growth, and how its profitability changes.

The second financial statement is the balance sheet, which primarily reports a company's finances.

If we say an income statement is like a video clip, then the balance sheet is like a snapshot.

It displays the assets, liabilities, and shareholders' equity of a company at the end of a fiscal period.

You can find key information in the balance sheet, such as the company's asset structure and short-term liabilities.

From a balance sheet, you can learn the quality of a company's assets, how quickly they can be converted into cash, and how capable the company is of repaying its debts.

Also, combined with the income statement, we can use the balance sheet to analyze the company's operating capability and its shareholder return.

The third financial statement is the cash flow statement, which reports a company's inflow and outflow of cash.

It records the cash inflows and outflows in operating, investing, and financing activities, respectively, during an accounting period.

The cash flow statement speaks to a company's ability to grow its business, the scale of its investments, and its dependence on creditors.

It is worth noting that we usually use all three financial statements to interpret a company's financial health and growth prospects because they are interwoven.

To wrap up, understanding financial statements may be part and parcel For US stock investors.

As it helps you know more about a listed company, spot potential investment opportunities, and help avoid speculation traps.

Analyzing all three financial statements may help make more informed investment decisions.