Value investing, at its core, is just looking at a company's actual financial performance and deciding whether the market has it priced too low, too high, or about right. Fundamental analysis works from one assumption: a stock's price wanders above and below its real, underlying worth — its intrinsic value — but tends to drift back toward it over months or years. That drift is called mean reversion, and it's the entire premise on which value investing rests.
Doing this well doesn't require memorizing an annual report. It requires knowing which numbers in that report actually matter, because most of a financial statement is noise once you know what you're looking for. There are three statements worth knowing, and a small handful of ratios that summarize them.
The income statement: how much a company actually kept
The number that matters most here is net income — what's left after everything else is paid for. Net income equals revenue, minus cost of goods sold, minus operating expenses, minus taxes and other costs: N = R − COGS − OpEx − T.
What counts as a "healthy" net income depends entirely on the industry, so there's no universal benchmark — a grocery chain and a software company will have wildly different margins for entirely normal reasons. For scale, Apple's net income for fiscal year 2025 was $93.7 billion.
The balance sheet: what's left after everything owed
The balance sheet is a single accounting identity: assets minus liabilities equals equity — in plain terms, what would actually be left for shareholders if the company settled every debt today. Assets are anything the company owns or is owed, from cash to inventory to receivables from customers. Liabilities are everything it owes to someone else, from accounts payable to long-term debt.
At the end of fiscal 2025, Apple reported $359.2 billion in total assets against $285.5 billion in total liabilities, leaving $73.7 billion in stockholders' equity.
The cash flow statement: where the cash actually went
Net income is an accounting figure, not a bank balance — a company can report a profit and still be short on actual cash, which is exactly why the cash flow statement exists separately. It tracks real cash in versus real cash out, split into three categories: operating, investing, and financing activity. Those three together make up the net cash flow for the period, and ending cash is simply beginning cash plus that net change.
Apple started fiscal 2025 with $29.9 billion in cash and ended it with $35.9 billion — a net increase of roughly $6 billion over the year, even after tens of billions spent on stock buybacks and dividends.
A company can be profitable on paper and still run out of cash. The income statement tells you what was earned. The cash flow statement tells you what was actually collected.
The four ratios worth actually checking
Once you have those three statements, most of what value investors actually screen for boils down to four ratios — all built from numbers already sitting in the statements above.
| Ratio | Formula | What it tells you |
|---|---|---|
| Net Profit Margin | Net Income ÷ Revenue | How much of every dollar in revenue turns into actual profit. Higher is better, but the "normal" range varies enormously by industry. |
| Return on Equity (ROE) | Net Income ÷ Equity | How effectively shareholder capital is being put to work. 15% or higher is generally considered strong. |
| Return on Assets (ROA) | Net Income ÷ Total Assets | How efficiently the company's total asset base generates profit. Higher is better, and it's especially useful for comparing companies within the same industry. |
| Gross Margin | (Revenue − COGS) ÷ Revenue | How much room is left after direct production costs, before overhead. A signal of pricing power and production efficiency. |
None of this tells you what a stock will do tomorrow. What it tells you is whether the price you'd pay today is backed by a business that actually earns, owns, and holds onto real money — which, over long enough periods, turns out to be most of what matters.