The science of understanding and analysing
business financial statements starts here. And,
we've made it easy.
Just as a physician would not rely on any one test to
diagnose a patient, it is important for the credit
analyst to understand that there is no "one test"
that will achieve the goal of fully understanding the
financial health of a business.
For example, some industries, such as electric and
water utility companies, will often have most of their
money invested in "plant, property and equipment",
with large sums of money financing these projects in
the form of "long term debt".
While a wholesaler or retailer will have fewer dollars
invested in fixtures and more money in inventory -
with a great percentage of the money owed as short
term liabilities owed to vendors in the form of
Other businesses, such as contractors, architects,
design firms and other professional service
organizations will have few dollars in either fixed
assets or inventory; their primary business is
providing a service. So, there is generally little
needed in the way of an inventory of goods or
elaborate fixtures needed.
Knowledge is Power
Our resources are
wherever an internet
connection is available.
So, please bear in mind these two important points:
(1) Financial analysis of businesses should be
compared to other businesses within their "peer
It would be unfair to compare a railroad, with it's
need for infastructure...to a brokerage firm, that
provides financial services.
(2) Trend analysis is important in trying to see into
the future. As investment firms often warn, "past
performance is no guarantee of future results".
But, as a financial analyst, you will often detect
certain trends when you examine the financial
statements of a business over a period of years.
This is why it is important to review more than just
one year's financial statement. Do the math...and
compare results in each year...and try to determine