Understanding

Financial Statement
Analysis
A quick overview of financial statement analysis, its importance in making
informed business decisions, and how it provides an accurate financial
snapshot of a company.

by Noemi Aniban
Types of Financial Statements
Balance Sheet
A statement that lists out a
company's assets,
liabilities, and equity at a
given point in time. A quick
snapshot of whether a
company is financially
healthy and if it can pay its
debts.
Income Statement
A statement that reveals a
company's revenues,
expenses, and profits or
losses over a specific
period such as a quarter or
a year. It helps investors
and analysts understand a
company's financial
performance.
Cash Flow
Statement
This statement tracks
incoming and outgoing
cash flows from operating,
investing, and financing
activities. A crucial
document in
understanding the liquidity
and solvency of a
company.
Key Financial Ratios Used in Analysis
Leverage Ratios
These ratios help determine a company's level of
debt and its ability to pay back its loans. The
most commonly used ratios are debt-to-equity
ratio, debt-to-assets ratio, and interest coverage
ratio.
Liquidity Ratios
These ratios help determine a company's ability
to meet its short-term obligations using its
Profitability Ratios
These ratios help determine how profitable a
company is. Return on Equity (ROE), Return on
Assets (ROA), and Gross Margin are the most
commonly used ratios.
Activity Ratios
These ratios help determine how effectively a
company is using its assets to generate revenue.
Interpreting the Financial Statements
1 Horizontal 2 Vertical Analysis 3 Ratio Analysis
Analysis
A technique that A technique that
A technique that compares line items compares the ratios of a
compares financial within a financial company's financial
statements over time. It statement. It helps statements. It helps
helps analyze identify the percentage identify the company's
performance trends of expenses to revenue performance relative to
and identify areas of or assets to liabilities. its peers, industry
improvement. standards, or its own
past performance.
Common Pitfalls in Financial
Statement Analysis
Ignoring Cyclical Trends in
Industry
Some industries are affected by
seasonal or cyclical trends, which can
distort the financial statements for a
specific quarter or year
1 Basing Decisions on a
Single Ratio
Each ratio tells a different aspect of a
2 company's financial health, and a
single ratio alone doesn't provide the
whole picture.
3 Disregarding Non-
Financial Information
Financial statements can't tell the
whole story. It's crucial to consider
other factors such as management,
competition, industry trends, and
regulatory changes when making
financial decisions.
Case Study: Analyzing a Company's
Financial Statements
2019 2020 % Change

Revenue $10M $12M 20%

Net Income $2.5M $3M 20%

Current Ratio 2.45 2.20 -10%

Debt-to-Equity Ratio 0.75 0.71 -5%

By analyzing this company's financial statements, we can see that it has grown its revenue and net
income by 20% while decreasing its current ratio and debt-to-equity ratio. This suggests the company
might be taking on more risk to finance its growth. Further analysis is needed to determine the cause of
this change and if it's sustainable for the company's future growth.
Conclusion and Key Takeaways
Importance of Key Financial Common Pitfalls
Financial Ratios
Avoid relying on a single ratio
Statement or disregarding non-financial
Leverage ratios, profitability
Analysis ratios, liquidity ratios, and information. Consider
activity ratios are used to seasonal or cyclical trends in
It helps assess the financial
analyze and interpret the industry and always
health and performance of a
financial statements. analyze trends over time
company by using techniques
rather than just a single
such as horizontal and
period.
vertical analysis, ratio
analysis, and common-size
financial statements.