Learn how to read between the numbers and gain valuable insights from financial statements using practical analysis techniques.
Introduction to Financial Statements
1. Balance Sheet
Shows what a company owns and owes at a specific point in time.
2. Income Statement
Reports revenues and expenses over a specific period.
3. Cash Flow Statement
Tracks how cash moves in and out of the business.
4. Purpose of Analysis
Helps investors and managers make informed decisions about a company's health.
Ratio Analysis: Liquidity and Solvency
Current Ratio
Current Assets ÷ Current Liabilities
Measures a company's ability to pay short-term obligations.
Quick Ratio
(Current Assets - Inventory) ÷ Current Liabilities
A stricter test of short-term solvency.
Debt-to-Equity Ratio
Total Liabilities ÷ Shareholders' Equity
Shows how much a company is financed by debt versus equity.
Ratio Analysis: Profitability and Efficiency
Gross Profit Margin
(Gross Profit ÷ Revenue) × 100
Higher percentages indicate better efficiency in production.
Return on Assets
(Net Income ÷ Total Assets) × 100
Shows how efficiently a company uses assets to generate profits.
Inventory Turnover
Cost of Goods Sold ÷ Average Inventory
Indicates how quickly inventory sells. Higher is typically better.
Horizontal Analysis: Trend Evaluation
Common Size Analysis: Relative Proportions
[COGS] [Operating Exp] [Admin] [Marketing] [Net Profit]
Common size analysis expresses each line item as a percentage of a base figure. This makes it easier to compare companies of different sizes.
Putting It All Together: Case Study
Key Takeaways and Next Steps
Use Multiple Techniques
No single analysis tells the whole story. Combine approaches for deeper insights.
Know the Limitations
Past performance doesn't guarantee future results.
Continue Learning
Explore industry-specific ratios or take a financial analysis course.