Introduction to Financial Statement Analysis
by Joe Lan, CFA
Understanding financial statements is key to fundamental stock analysis and overall investment research. Financial statements provide an account of a company’s past performance, a picture of its current financial strength and a glimpse into the future potential of a firm.
This is the first in a new AAII Journal series on financial statement analysis. The goal is to enhance your ability to make a sound judgment about a company’s financial strength and future prospects by showing you the benefits of using financial statements in your personal investment research.
In this article
- Financial Statements and Their Key Elements
- How the Statements Are Linked
- Where to Find Financial Statements
- Accounting Standards
- Next in the Series
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Given the varied financial knowledge of our readers, I will address many topics that some may find very basic. However, to build a strong understanding of advanced topics, you need a solid foundation. As we progress through this series, I expect to touch on more advanced topics when explaining how I personally use financial statements to analyze a firm. In this introductory article, I explain the major components of each financial statement and why they matter in security analysis.
Financial Statements and Their Key Elements
The role of financial reporting for companies is to provide information about their fiscal health and financial performance. As investors, we use financial reports to evaluate the past, current and prospective performance and financial position of a company. These statements allow us to compare one firm to another and form the basis of valuing the worth of a stock.
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Discussion
For me this is very helpful and interesting. I have read remedial books and I still get completely befuddled by the 100 page reports of real corporations. It is a learning process. Every time I read about this something more sticks to my brain. I look forward to receiving the print magazine. Thanks!
posted about 1 year ago by Steven from Iowa
I hope that in future articles you will highlight the areas of the income statement that include great differences between cash accounting and accrual accounting. Simply looking at an income statement without understanding the areas that can increase or decrease net income without having an impact on cash flow can cause one to completely misunderstand the position and prospects of a corporation.
posted about 1 year ago by Gerald from Georgia
Much reference in earnings reports is given to EBITDA as a guideline in evaluating how a company is doing. Charlie Munger ( Warren Buffett's partner in Berkshire Hathaway) describes EBITDA as (ahem) "bullshit earnings."
So, considering the above comment by CM, what is your interpretation of EBITDA, EBIT as to say free cash flow or whatever else?
(statement above by CM is found in"Poor Charlie's Almanack, p120. 2nd Edition)
posted about 1 year ago by Ray from Montana
I appreciate your efforts and learned something from them. However, it would have been more instructive had you continued discussing Kellog or instead of using Kellog's three statements generated some reasonable ones for the widget maker. It would have then been possible to go back and re-look at the statements with greater insight and more assurance that my understanding was correct.
posted about 1 year ago by Curtis from North Carolina
I go over financial statements from accounting texts and 10k forms from several companies in which I have stock. Your review was very nice.
posted about 1 year ago by Robert from Tennessee
Good information. I'm looking forward to the future articles on this subject.
posted about 1 year ago by Michael from Illinois
Very interesting discussion of how the three statements interact. I was once stumped with how depreciation would be an addition to the cash flow sheet and it finally occurred to me that it is negative on the income sheet. Like a mirror image. I am tempted to make a schematic or chart of what this article brings to light.
posted about 1 year ago by Steven from Iowa
www.calcbench. com - It's free
I am an AAII member. I'm also the co-founder of a financial data website that gives people access to fundamentals. Our difference? We are using the XBRL standard that reports the financials as the filing companies report them. NOT as a third party vendor interprets them. We also give you the ability to share information among a team that you might create. This is just for starters. Again - www.calcbench.com
Best part. We are just getting started.
posted about 1 year ago by Pranav from New York
Good information. A great resource for this is "The Interpretation of Financial Statements" from the original guru of security analysis, Benjamin Graham.
Less than a 100 pages and very clearly explained.
http://www.amazon.com/Interpretation-Financial-Statements-Benjamin-Graham/dp/0887309135/ref=sr_1_1?ie=UTF8&qid=1326384600&sr=8-1
posted about 1 year ago by Pavan from Michigan
This article is business school accounting and finance 101 made simple. I find it very refreshing especially on cash flow analysis and how all the other statements tie in together.
Looking forward for the next follow up article.
Roland Kyei Atupem, Boston , MA
posted about 1 year ago by Roland from Massachusetts
This article is business school accounting and finance 101 made simple. I find it very refreshing especially on cash flow analysis and how all the other statements tie in together.
Looking forward for the next follow up article.
Roland Kyei Atupem, Boston , MA
posted about 1 year ago by Roland from Massachusetts
This article is business school accounting and finance 101 made simple. I find it very refreshing especially on cash flow analysis and how all the other statements tie in together.
Looking forward for the next follow up article.
Roland Kyei Atupem, Boston , MA
posted about 1 year ago by Roland from Massachusetts
The article was very informative and helpful. I look forward to the future articles.
posted about 1 year ago by Ronald from Louisiana
Thanks so much for delving into this area! For those interested in truly understanding fundamentals, your presentation is great! Look forward to all the future ones. Thanks again.
posted about 1 year ago by Sandra from California
I like to know what keys in the company's finances are the best signals to pick the winners in the stock market within a reasonable time frame.
posted 7 months ago by Juan Ortega from Texas
Great series! Have you thought of consolodating them into a single primer for those of us who would like a "Ready Referance" - Also you might want to include the list of 16 financial ratios from the September issue.
Just a thought
posted 5 months ago by J Padulo from New Jersey
