Instructions on how to analyze corporate financial statements
Financial statement analysis is the process of reviewing, checking, comparing, comparing data and making assessments of the financial situation of the enterprise in the current period with previous business periods. From there, it helps businesses, banks, investors and related parties make the most appropriate economic decisions.
Specifically, below are detailed instructions on how to analyze financial statements and important notes when analyzing financial statements for your reference.
Currently, there are 6 popular financial statement analysis methods including:
Comparison method: Applied when evaluating the fluctuations of items/indicators through reviewing financial statements of many consecutive years.
Ratio method: Is a method of using ratios to perform analysis by comparing one indicator with another, thereby evaluating the performance and financial situation of the company.
Segment analysis method: Used to evaluate the profitability of a business by combining traditional performance management tools to help grasp the causes of positive and negative fluctuations in business operations.
Segmentation method: Used to evaluate the business process and results of a business from different perspectives by dividing the total process and results into specific components based on certain criteria.
Correlation method: Used to study and evaluate the economic relationship between economic events and phenomena in the same period, and at the same time check the balance of economic indicators during the operation process.
Factor analysis method: Used when studying and examining the economic relationship between the analysis indicator and influencing factors to better understand the real cause behind the fluctuations of the indicator.
How to analyze a business’s financial statements
Although there are many different methods of analyzing financial statements, they all go through the following 3 basic analysis steps.
Step 1: Find out the information that the business needs to analyze the financial statements
To be able to analyze the financial statements in the easiest way, you need to understand the business clearly. Specifically, the information that needs to be collected includes:
Information about the business’s industry/business to have an overview of the business market.
The latest financial statements of the business and financial statements of previous periods for comparison information.
Step 2: Understand the financial reporting system
Balance sheet
The balance sheet is a summary financial statement that reflects the total value of the existing assets and the sources of those assets of the business at a certain point in time.
Analyzing the balance sheet helps you grasp information about the balance between assets, liabilities and equity to assess the debt payment ability and financial stability of the enterprise.
Specifically, to analyze the balance sheet, do the following:
Read the overview of assets, capital sources and other items
Read the detailed data on assets and capital sources such as:
Fixed assets.
Short-term assets.
Liabilities.
Owner’s equity.
Cash assets.
Receivables.
Inventories
Other debts.
………
Calculate the basic financial indicators and then evaluate the business’s situation
Make an assessment after analyzing the balance sheet. For example:
Where are the assets of the enterprise concentrated? Where did they originate?
The proportion of capital sources and equity of the enterprise
The proportion of short-term and long-term debt in liabilities.
Identify the items that increase or decrease and the rate of increase or decrease at the beginning and end of the period.
Indicators used when analyzing the balance sheet:
Current ratio
Quick ratio
Asset turnover ratio
Inventory turnover ratio
Debt-to-equity ratio
Income statement
The income statement is a report that shows the revenue, expenses, and profits of a business during a period.
To analyze the business performance report, you do the following:
Separate revenue and expenses
Calculate:
Proportion of each revenue in Total revenue,
Proportion of each expense in Total expense,
Compare their changes compared to the same period
Information that needs to be grasped after analyzing the business performance report includes:
Total revenue, expenses, profit
Are the changes in revenue, expenses, and profits in the same direction?
Main sources of profit
Business activities that are causing losses
Indicators used when analyzing the business performance report:
Gross profit margin
Operating profit margin
Operating expense ratio (OER)
Net profit margin
Return on sales (ROS)
The cash flow statement is a report that shows the cash flows generated and used in the production and business activities of an enterprise in a fiscal year.
Analyzing this report helps you know
