FINANCIAL STATEMENT ANALYSIS

Preparing a Financial Statement and analysing a Financial Statement are two completely different things and require a different set of skills. This is something I knew but never really thought about until very recently. At the beginning of the Corporate Financial Analysis course, we spent quite a bit of time on recording financial transactions and its impact on the financial statement. To be honest I was wondering how this was my business or when I would ever get to do this seeing as I had no intention of switching careers to accounting. I finally convinced myself it was important to understand the back end of the financial statements you review.

Now we are at the second half of the course and are faced with analysing financial statements and understand it a bit better. It was not really about the recording of financial transactions or the accounting of it; that was not my essential concern, really it was how to interpret the financial statement to be able to make informed financial decisions. How else can you tell if the financial statement you are analysing is financially engineered or creatively prepared to lure uninformed investors if you do not understand where each item goes in the first place. How can you even begin to analyse it?

The analysis entails a process of examining a company’s financial statements to evaluate its financial performance, cash flows and position. It requires reviewing the balance sheet to ascertain a company’s overall financial health. You may also need to compare the company with its peers to enable you gauge the industry averages and performance to draw the appropriate conclusions and make an informed decision. Financial statements analysis is an important skill for investors and other stakeholders as they are used for making investment decisions. While Financial Statements provide an overview of a company’s financial performance, and there are several aspects to consider.

❖ The Balance Sheet: It provides a view of the company’s Assets, Liabilities and Equity at a particular time and the composition of each of these accounts will need to be reviewed over a period to check the company’s growth process or otherwise.

❖ Profit and Loss Statement or Income Statement: This shows the companies revenue and expenses as well as its net income. This account will also need to be reviewed and the company’s trend compared over time as well as compared with its industry peers to provide insight into the company’s abilities and decisions.

❖ Ratios: Calculating financial ratios from the financial statement offers a way to analyse various aspects of a company’s financials such as liquidity, profitability, and debt ratios to compare with other industry competitors to ascertain the company’s performance relative to its competitors.

❖ Management Statements and Notes: these are the explanations and context provided by the company management on the financials and they go a long way to explain the company policies or events that may have resulted in the numbers. Over the last few weeks,

I have learnt that although recording financial transactions are essential for generating accurate and dependable financial statements since we don’t want to mislead investors with the wrong financial information, financial statements analysis is essential for making investment decisions and hence a very important skill worth acquiring.