If the balance sheet tells you if a business can survive the winter, the income statement tells you what food it has in the pantry.
Modern investors rarely look at the statement of retained earnings, but Graham treats it as a confession. It reveals how much of reported net income was actually kept in the business, and how that surplus was used—whether reinvested, written off, or distributed as stock dividends. A company that consistently reports profits but sees no growth in surplus is likely paying out too much in dividends or burning cash on poor investments. If the balance sheet tells you if a
: Be wary of one-time gains or accounting tricks that distort true profitability. High Debt Levels A company that consistently reports profits but sees
, widely celebrated as the "Father of Value Investing," established a paradigm in 1937 that remains the cornerstone of fundamental analysis. His book, The Interpretation of Financial Statements His book, The Interpretation of Financial Statements