Financial statement analysis

The statements tell you what happened. Analysis tells you why, and whether it continues.

Read the three statements against each other

A single statement is almost never enough. The income statement reports profit, the cash flow statement reports cash, and the gap between them is usually the story.

• Net income rising while operating cash flow falls is the signal worth chasing first. It means working capital is absorbing the growth, or revenue is being recognized ahead of collection.
• The balance sheet is a point in time; the other two cover a period. Comparing a period figure to a point-in-time balance without averaging the balance overstates efficiency ratios.
• Read the notes. Concentration of customers, debt maturities, commitments, related parties, and subsequent events routinely matter more than anything on the face of the statements.

Do fluctuation analysis before you compute a single ratio