How to Write a Financial Statement Analysis

by Robert Shaftoe; Updated September 26, 2017
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Financial statement analysis reviews are used to support investment decisions and valuation analyses. They're also included in annual reports to investors. Management teams include a comprehensive discussion of financial results in their annual Securities and Exchange Commission Form 10-K corporate filings. A financial statement analysis must therefore be well-written, conclusive and include any material financial disclosures.

Incorporate Financials

It's easy to focus only on the income statement and what a company has earned. However, make sure to include information regarding changes in the company’s balance sheet and in its cash balance as detailed in the statement of cash flows. Work through every section of each financial statement. That means focusing on assets, liabilities and equity in the balance sheet. Be ready to reconcile operation cash flows while also disclosing material financing and investing cash flows.

Be Insightful

A financial statement analysis that lacks meaningful conclusions is incomplete at best. Management, shareholders and lenders require an insightful analysis to make informed decisions. Incorporate qualitative information into your quantitative analysis to explain changes in revenue levels or asset utilization ratios. The figures alone have little significance without the stories driving those numbers to add context. Perhaps the most important factor in writing an insightful financial analysis is having access to management to conduct an interview. Prepare solid questions and don't ask about things that can be answered via public information.

Comparative Benchmarks

As a first step, you should select an appropriate benchmark to compare against your subject company results. The benchmark needs to be meaningful and ideally would be the average and median results of a group of peer companies that closely resemble the subject company in terms of size, growth and line of business. You should have a deep understanding of the subject company’s product lines in order to select an appropriate peer group. Some companies have very complex products; for example, biotech or software companies. Be diligent in studying the subject company’s web site, marketing brochures and any other relevant information to understand the company and its competitors.

Ratio Analysis

Performing a ratio analysis helps to ensure that you have quantitative data that supports your qualitative conclusions. Ratio analyses are highly industry-specific, but generally are of the following types: size, growth, liquidity, leverage, profitability and turnover. Compare the results of your ratio analysis to competitors to determine relative strengths and weaknesses. Calculate historical trends while generally focusing on the last five years of financial results. Recognize and acknowledge whether sales and returns are trending in a certain direction. Understand whether financial results are affected by industry cycles or seasonal variables.

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