Seven stages teach students of finance, accounting, and economics how to move from reading a company’s figures to estimating its value—and why a company’s profits alone don’t make its shares a good investment.

When a company announces that it earned 100 million riyals, does that mean it has an extra 100 million riyals in its bank account? And does rising profit mean its stock is worth buying?

Not necessarily.

To answer these questions, a financial analyst needs to understand the company’s business, read its financial statements, forecast its performance, and then estimate its value.

This process involves seven interconnected stages.

1. Accounting: How are a company’s operations translated into numbers?

The journey begins with understanding how companies record their revenues, expenses, assets, and liabilities.

If a company sells products worth one million riyals and allows customers to pay three months later, it may record the revenue today even though it has not yet received the cash.

Here, the analyst learns a fundamental principle: earning revenue does not necessarily mean collecting cash.

Understanding this relationship is essential for interpreting the figures that later appear in the financial statements.

2. Financial statements: Where did the company’s money go?

After understanding accounting, the analyst moves on to reading three key statements.

The income statement shows revenues, expenses, and profits over a given period.

The balance sheet reveals what the company owns in assets, what it owes in liabilities, and its shareholders’ equity at a specific date.

The cash flow statement shows the money that has actually flowed into and out of the company.

Reading the statements together is important because a company may report accounting profits while facing a cash shortage due to delayed collections or increased capital spending.

3. Finance: Why isn’t a riyal today worth the same as a riyal in the future?

If you were offered 1,000 riyals today or the same amount a year from now, which would you choose?

You would probably prefer to receive it today, because you could invest it and earn a return, and because waiting involves risk.

This idea is called the time value of money.

Using this concept, analysts learn to calculate the cost of capital: the cost of the funds a company obtains from lenders and shareholders.

This knowledge later helps them determine the present value of future cash flows.

4. Financial analysis: Is the company really performing well?

Profits alone are not enough to judge a company’s performance.

The analyst asks: Are sales growing? Are profit margins improving? Is debt increasing? And how does the company perform compared with its competitors?

Financial ratios and indicators are used to answer these questions.

For example, if sales rise by 20% while expenses increase by 30%, the company’s profitability may decline despite business growth.

The analyst also distinguishes between profits generated by ordinary business activities and exceptional gains, such as the sale of a property.

The goal is not just to know how much profit the company made, but to understand where it came from and how sustainable it is.

5. Financial modeling: How do we forecast the company’s performance?

After studying the past and present, the analyst begins estimating the future.

They build a financial model that includes forecasts of revenues, expenses, investments, debt, and cash flows for the coming years.

If the company plans to open 20 new branches, the analyst estimates the cost of opening them, their potential sales, and when they might start generating profits.

The analyst then tests the impact of these assumptions on the financial statements.

A financial model is not a certain prediction of the future, but a tool for calculating possible outcomes based on specific assumptions.

6. Valuation: What is the company worth?

Here, the analyst reaches one of the most important questions in financial analysis: What is the company worth?

One of the most widely used methods is discounted cash flow (DCF) analysis.

It involves estimating the cash the company could generate in the coming years after meeting its operating and investment needs, then calculating its present value using a discount rate that reflects the cost of capital and the risks involved.

The analyst adds the value of the cash flows expected beyond the detailed forecast period to arrive at the enterprise value.

After making the necessary adjustments, including subtracting net debt, the analyst can estimate the value of shareholders’ equity and then divide it by the number of shares to arrive at an estimated value per share.

But is this value final?

7. Scenarios: What if our forecasts are wrong?

Suppose an analyst estimates a company’s fair value at around 50 riyals per share.

What happens if sales growth slows, financing costs rise, or the company earns more than expected?

This is where the analyst uses scenario and sensitivity analysis.

They create a base-case scenario, an optimistic one, and a conservative one, then test how changes in assumptions affect the share’s value.

This may produce an estimated range of values rather than a single figure.

That better reflects the reality of valuation, since it relies on forecasts that cannot be guaranteed.

Does the analyst’s job end once a fair value has been determined?

No.

Every earnings announcement, change in interest rates, or development in the sector may call for assumptions to be reviewed and the valuation to be updated.

This is where the difference between a stock’s price and its fair value becomes clear.

A stock’s price is the amount at which it trades in the market, while its fair value is an estimate based on an analysis of the company’s performance, prospects, and risks.

The two may differ, but that does not necessarily mean there is a guaranteed investment opportunity.

A financial analyst does more than read numbers: they try to understand what has happened to the company, what may happen next, and what it is worth in light of those expectations.

That is the journey from accounting to valuation: first understand the numbers, then interpret them, and finally make a decision based on analysis rather than impressions.