Reading 33 Financial Statement Analysis: Applications (Intro)
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This reading presents several important applications of financial statement analysis. Among the issues we will address are the following:
What are the key questions to address in evaluating a company’s past financial performance?
How can an analyst approach forecasting a company’s future net income and cash flow?
How can financial statement analysis be used to evaluate the credit quality of a potential fixed-income investment?
How can financial statement analysis be used to screen for potential equity investments?
How can differences in accounting methods affect financial ratio comparisons between companies, and what are some adjustments analysts make to reported financials to facilitate comparability among companies.
The reading “Financial Statement Analysis: An Introduction” described a framework for conducting financial statement analysis. Consistent with that framework, prior to undertaking any analysis, an analyst should explore the purpose and context of the analysis. The purpose and context guide further decisions about the approach, the tools, the data sources, and the format in which to report results of the analysis, and also suggest which aspects of the analysis are most important. Having identified the purpose and context, the analyst should then be able to formulate the key questions that the analysis must address. The questions will suggest the data the analyst needs to collect to objectively address the questions. The analyst then processes and analyzes the data to answer these questions. Conclusions and decisions based on the analysis are communicated in a format appropriate to the context, and follow-up is undertaken as required. Although this reading will not formally present applications as a series of steps, the process just described is generally applicable.