How to Analyze Financial Statements with Example

Financial Statement Analysis

Full introduction, to financial statement analysis, including vertical, horizontal, and ratio analysis.

talk about financial statement analysis you know that the goal of accounting is to produce financial statements that can be useful for decision making.

financial statements are used to both understand and evaluate which means assess or judge the results of business activities, for instance, the managers of a business use financial statements to review past performance and make decisions about it.

the future creditors such as banks use the financial statements to assess a business to make decisions with regards to loans shareholders who are really the owners of any business assess the financial statements to make decisions about future investments every single stakeholder who has to make resource allocation decisions.

That's decisions about you guessed it money use the financial statements to make informed decisions but they can only do that if they analyze the financial statements in a systematic way.

That means organized or orderly generally in accounting courses you're taught specific financial statement accounts in isolation for instance you might learn about accounts receivable and the allowance for doubtful accounts but it's separate from the business decisions that might be impacted by those balances the problem with that is you can only understand and evaluate a business when you look at the financial statements as a whole.

The Four Basic Financial Statements

Let's look at the four basic financial statements. The four basic financial statements are the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows.

Together these four statements give an overall picture of how a company is doing. So let's start with our basic accounting equation.

List of four Basic statements

• Financial statements are the balance sheet

• The income statement

• The statement of retained earnings

• And the statement of cash flows.

Our basic accounting equation of asset equals liabilities plus stockholder's equity is the basis for all accounting. And therefore is also the basis for our financial statements. So let's take our basic equation and now expand down into the expanded accounting equation.

We do this by first, taking the stockholder's equity and breaking it into its two components of retained earnings and common stock. We then can take the retained earnings and break them into net income, which increases retained earnings. And Dividends, which decreases retained earnings. Next, we can take the net income, and break it down into revenues, which increase net income, and expenses, which decrease net income.

Top 4 Types of Financial Statements

• BALANCE SHEET

• INCOME STATEMENT

• STATEMENT OF CASH FLOWS

• STATEMENT OF SHAREHOLDER’S EQUITY

Balance sheet:

It is a tabular sheet of balances of assets, liabilities, and equity.

It mainly represents the Basic accounting Equation

As we just noted that the balance sheet is nothing but a set of balances.  Balances can change every day.  Therefore, a balance sheet is presented at the end of a particular date. The date for presenting the balance sheet for the annual report is the last date of the financial year.

INCOME STATEMENT:

Statement of revenues and expenses

Unlike a balance sheet, the income statement is prepared for a certain period. In can be weekly, monthly, or yearly.

After deduction of every type of cost, you arrive at a different interpretation of income which is expressed as below:

Earnings before Interest Tax Depreciation and Amortization (EBITDA)

Earnings before Interest and Taxes (EBIT)

Net Income before Preferred Dividends

Net Income (NI)

STATEMENT OF CASH FLOWS:

A cash flow statement is the statement of cash inflow and outflow

It is simply a statement of cash generation and its use by different activities categorized under three different broad activities.

Operating Activities,

Investing Activities, and

Financing Activities.

STATEMENT OF SHAREHOLDER’S EQUITY:

It is a statement showing the capital investment by stockholders and the retained earnings of the company. Like the balance sheet, a statement of stockholders' equity is also a statement presented as on a particular date. This date is commonly 31st December in the US. 

The two main parts of this statement are common stock and retained earnings and the total of both make it to total equity.

How To Analyze a Balance Sheet

know what a balance sheet actually is so a balance sheet is one of three financial documents that companies have to report to the public and the purpose of a balance sheet is to show you the financial strength of a business.

The balance sheet shows you the assets the liabilities and the total shareholder equity of the business and these three numbers and how they balance out are very important when you're looking at investing in a new business so the best free place to go and take a look through company's balance sheets that I found at least is Yahoo Finance.

so I'm someone who learns best by having something thrown at me and putting it into a practical. use so I'm just going to show you guys directly on the computer how I go through balance sheets what I'm looking for and really how to read them so let's just hop into the computer now and I'll show you guys some real-world case studies. so that we can get a better idea of how to actually read a balance sheet.

Financial ratio analysis

Financial ratios explained! How does financial ratio analysis work? Let’s discuss ten of the most popular financial ratios that can help you find the story behind the numbers.

What do you need to get started on a financial ratio analysis? You need an income statement, an overview of how much profit a company made during a year. You also need a balance sheet, an overview of what a company owns, and what a company owes at a specific point in time.

We will start off with financial ratios that only focus on the income statement, then look at #financialratios that only focus on the balance sheet, and end with powerful financial ratios that combine information from the income statement and the balance sheet. 

Performing a financial ratio analysis has a scientific element to it (finding data and putting it into formulas), as well as an artistic element (assigning meaning to the outcome of the calculations, and seeing the big picture).

financial ratio analysis, we cover ten financial ratios: 

On the income statement: gross profit %, operating margin %, return on sales % On the balance sheet: current ratio, debt-to-equity, equity as % of total When linking the P&L and the balance sheet: return on equity, asset turnover, receivables turnover, inventory turnover

Philip de Vore (The Finance Storyteller) aims to make strategy, #finance, and leadership enjoyable and easier to understand.

Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better-investing decisions.

THE INTERPRETATION OF FINANCIAL STATEMENTS 

Fundamental analysis & value investing 101. This video presents the 5 greatest takeaways from Benjamin Graham’s classic, The Interpretation of Financial Statements.

• -Know thy income statement and balance sheet

• -Ratios are useful when considering the fundamentals of a company, but beware. If the numbers are healthy or not depends on the industry.

• -It’s quite common that stocks are “watered” to look like they perform better than they actually do

• -If a stock is priced lower than its current book value, the intelligent investor should take a closer look. This could be a great value investing opportunity

• -To achieve maximum portfolio returns, the value investor should do both a quantitative and qualitative analysis of his stock market investments