This reading describes selected applications of financial statement analysis. In all cases, the analyst needs to have a good understanding of the financial reporting standards under which financial statements are prepared. Because standards evolve over time, analysts must make sure their knowledge is current in order to make good investment decisions.
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:
When examining the data, the analyst should try to find answers to critical questions, including:
Two examples are presented in the textbook to illustrate the application.
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1. Reporting Standards,
2. common-size financial statements,
3. Financial ratios,
4. Competitiveness, and
5. Key Performance Indicators.