Guide to Financial Statement Analysis for Beginners
Many people who are just getting started with finance often feel it a headache to deal with financial statements. In fact, to do financial statement analysis, you only need to master the formula of “idea + content + tool”. Clearly define the ideas for report analysis, know what to analyze, determine the metrics, and finally select a good reporting tool to achieve the final analysis results.
1. Purpose of Financial Statement AnalysisDifferent people do financial analysis for different purposes, but the common purpose is to obtain information that is useful for their economic decisions from financial statements. Therefore, there are three objects of financial statement analysis: financial position, operating results and cash flow. Based on this, the solvency analysis, profitability analysis and operational capability analysis that we need to do constitute the general framework for financial statement analysis. For example, the competent department of the enterprise, the parent company, and the financial department focus on analyzing and checking the allocation of relevant resources of the enterprise, the compliance with financial and economic policies and financial systems, and the capital maintenance and capital appreciation. Investors focus on analyzing the profitability, operational capacity and use of funds, and understanding investment returns and investment risks. Creditors focus on analyzing the solvency of enterprises, evaluating the degree of financial security or risk of enterprises, and so on. Considering the different requirements of internal management, the content of financial statement analysis is very extensive. It should help report users to summarize and evaluate the financial condition and operating results of enterprises, and to provide a reliable basis for making economic forecasts and decisions.
2. Ideas of Financial Statement Analysis
2.1 Basic Ideas
2.2 Analytical Methods
- Structural Analysis
- Trend Analysis