Four Basic Steps to Gauging a Firm's True Financial Position
Understanding a company is similar to understanding your own personal finances. In fact, if you look at a company's financial statements, you will find that they are similar to our own "personal" financial statements. However, for most of these, there is a different basis for how items are reported. Table 1 provides a simple analogy.
| TABLE 1. Financial Statements: Corporate and Personal Similarities | |
| Corporate Statement | Personal Statement |
| Balance Sheet | Mortgage Application |
| Cash Flow Statement | Checking Account Statement |
| Income Statement | Personal Tax Return |
| Footnotes to Financials | How you explain your finances to an investment advisor or IRS auditor |
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If you were to analyze your own finances, you typically would start by looking at how much money you have in your checking account and at the transactions posted to your account. This usually represents "the truth" about how you really spent all of your money.
This is very much how analysts look at corporate financial statements—starting with the cash flow statement—to get at "the truth."
This article outlines four basic cash flow analysis steps you can use to better understand a company's financial position.
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