Analyzing Financial Statements
Digging for the facts, sifting through information, checking reliable sources... it’s all part of the modus operandi of every good financial analyst.
Financial analysis is an investigative process. The need to know the how and why is essential for a thorough analysis of a corporation’s financial health. The essence of being a good investigator is knowing what questions to ask and where to find the answers, and that’s certainly true when it comes to analyzing a company’s financial status.
For a banker who’s considering making a substantial loan to a company, his primary concern is the company’s ability to pay back its loan. That generates questions about such things as short-term liquidity and the short-term obligations coming due within the twelve-months cycle. These will figure pretty heavily into the banker’s assessment of what is the repayment capacity on the loans.
From the investor’s point of view, investors are mainly concerned with profits. The main question that guides an analyst’s investigation is whether the company is profitable. The answers to many basic questions about the company’s performance are found in the financials. They can tell you about the company’s rise or decline in profits, as well as in liabilities and assets.
While financial statements focus on what has happened is the past, you must also look forward. Financial analysis is all about looking beneath the surface to find areas of strength and potential weaknesses.
How could you use the numbers presented in the financial statements to get a meaningful insight about a company’s financial status and to judge a company’s performance? Mathematical evaluation techniques are used to answer these questions: Comparative financial statements, trend analysis and ratio analysis.