The Economics Behind The Numbers

Understanding financial statements through business economics.

Financial statements are often taught as collections of ratios, formulas, and accounting rules.

This series takes a different approach.

It’s the framework I’ve gradually developed to analyze businesses—a practical set of mental models that helps separate what matters from what merely looks impressive.

It came from realizing that high revenue growth, record order books, or low P/E multiples often say very little about the quality of a business in isolation. I’ve seen companies with order books several times their annual revenue struggle under working capital pressures, rely increasingly on debt, and ultimately destroy shareholder value.

And there were exceptional businesses earning high returns on capital that never became exceptional investments because they lacked opportunities to reinvest those returns and compound over time.

That shifted my focus away from headline metrics and toward the underlying economics of the business—how it generates cash, allocates capital, funds growth, and earns durable returns.

The goal of this series is to help you understand businesses more deeply. By the end, you’ll have a high-signal framework for analyzing almost any business from first principles.

One final note: while the ideas and framework are my own, I’ve used AI extensively to challenge my thinking, refine rough ideas, improve clarity, and stress-test explanations.

The Six Questions

Every great business can be understood by answering six simple questions.:

  1. Can I trust the company’s growth?
  2. Does the business create value?
  3. Can the business scale profitably?
  4. Do accounting profits become cash?
  5. Can management compound capital?
  6. Is the business financed intelligently?

Chapters

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Capital Structure — The Economics of Financing
Getting Actual Cashflows from Accounting Earnings
The Fragility of Learning from History
Narratives, Hindsight, and the Illusion of Certainty