Financial Statement Analysis


Financial statement analysis is an important part of business analysis

Business Analysis

– process of evaluating a company’s economic prospects and risks, which includes:

  1. Business environment
  2. Strategies
  3. Financial performance & position

Financial Statement Analysis

– the application of tools and techiniques to:

  1. Produce estimates
  2. Lower uncertainty
  3. Make better decisions

Types of Business Analysis

Credit analysis

– Concerned with the risk of default and creditworthiness

– Short-term liquidity

– Long-term solvency

– Sustainable earning power

Equity analysis

– Technical analysis, charting, searches for patterns in the price or volume history of a stock to predict future price movements

– Fundamental analysis, finding the intrinsic value

– Prospective analysis, future cash flows

Components of Business Analysis

– Industry Analysis

  1. SWOT
  2. Porter’s 5 Forces
  3. Value Chain Analysis

– Accounting Analysis

  1. Extent of company’s accounting reflecting economic reality
  2. Comparability problems
  3. Accounting distortions

– Financial Analysis

  1. Profitability Analysis, return on investment, profit margins, turnover
  2. Risk Analysis, ability to meet commitments

Basis of Analysis (Business Activities)

  1. Planning, business plan
  2. Financing, internal and external (debt or trade creditors)
  3. Investing, operating and financial
  4. Operating, R&D, procurement, production, marketing, administration

Financial Statements

Balance Sheet

  1. Assets = Liabilities + Equity
  2. Assets, what the company owns, resources & factors of production
  3. Liabilities, what the company owes, funding & obligations
  4. Equity, funds invested or contributed and retained earnings

Income Statement

  1. Net income, indicator of profitability
  2. Gross profit, sales minus cost of sales
  3. Earnings from operations, sales minus operating costs & expenses
  4. Earnings before tax, earnings before provision of income tax

Analysis Tools

Comparative financial statement analysis

  1. Horizontal
  2. Year to year
  3. Time series analysis
  4. Trends

Common-size analysis

  1. Vertical
  2. Sources of financing
  3. Composition of assets

Ratio Analysis

  1. Liquidity, solvency, profitability, asset utilization
  2. Factors affecting ratios, economic events, industry factors, management policies, accounting measures, numerator and denominator

Cash flow analysis

  1. Sources of funds
  2. Uses of funds
  3. Forecasting future cash flows
  4. Liquidity analysis


  1. Debt valuation
  2. Equity valuation



2 Responses to “Financial Statement Analysis”
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