Financial Reporting and Analysis IV
Reading 30. Financial Statement Analysis: Applications
Learning Outcome Statements
a. evaluate a company's past financial performance and explain how a company's strategy is reflected in past financial performance;
CFA Curriculum, 2020, Volume 3
Subject 1. Evaluating Past Financial Performance
Evaluating a company's historical performance addresses not only what happened but also the causes behind the company's performance and how the performance reflects the company's strategy. The analyst needs to create common-size financial statements, calculate the financial ratios of the company, its competitors, and the industry, and make necessary adjustments. After processing the data, the analyst should perform:
- time series analysis to compare the company's performance to itself over time to examine the trend of its ratios (e.g., profitability, efficiency, liquidity, and solvency ratios).
- cross-sectional analysis to compare these ratios to those of its competitors or the industry.
When examining the data, the analyst should try to find answers to critical questions, including:
- What are the key performance indicators of the company, in light of its competitive strategy?
- What is driving the company's current performance? Specifically, what factors are causing the changes of a particular ratio over time? Why?
- What aspects of performance are critical for the company to succeed in the market? How did the company do in the past?
- What strategy does the company have and what were its impacts on the company's performance in the past?
Two examples are presented in the textbook to illustrate the application.
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In the textbook? Great...
Read up on
1. Reporting Standards,
2. common-size financial statements,
3. Financial ratios,
4. Competitiveness, and
5. Key Performance Indicators.