4.3. Process Data

#cfa-level-1 #reading-22-financial-statement-analysis-intro

After obtaining the requisite financial statement and other information, the analyst processes these data using appropriate analytical tools. For example, processing the data may involve computing ratios or growth rates; preparing common-size financial statements; creating charts; performing statistical analyses, such as regressions or Monte Carlo simulations; performing equity valuation; performing sensitivity analyses; or using any other analytical tools or combination of tools that are available and appropriate for the task. A comprehensive financial analysis at this stage would include the following:

  • Reading and evaluating financial statements for each company being analyzed. This includes reading the notes and understanding what accounting standards have been used (for example, IFRS or US GAAP), what accounting choices have been made (for example, when to report revenue on the income statement), and what operating decisions have been made that affect reported financial statements (for example, leasing versus purchasing equipment).

  • Making any needed adjustments to the financial statements to facilitate comparison when the unadjusted statements of the subject companies reflect differences in accounting standards, accounting choices, or operating decisions. Note that commonly used databases do not make such analyst adjustments.

  • Preparing or collecting common-size financial statement data (which scale data to directly reflect percentages [e.g., of sales] or changes [e.g., from the prior year]) and financial ratios (which are measures of various aspects of corporate performance based on financial statement elements). On the basis of common-size financial statements and financial ratios, analysts can evaluate a company’s relative profitability, liquidity, leverage, efficiency, and valuation in relation to past results and/or peers’ results.


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