Lesson 2 of 6 · 14 min
The financial statement analysis framework
Good analysis follows six phases: define the purpose and context, collect data, process it, analyse and interpret the results, communicate conclusions, and follow up as new information arrives.
In short
- Six phases: articulate purpose and context → collect data → process data → analyse/interpret → develop and communicate conclusions → follow up.
- Start with the purpose and the specific questions, not with ratios. Context covers the audience, deliverable, deadline and resources.
- Collecting data means understanding the business model, performance and position, often top-down: economy → industry → company.
- Processing turns raw data into usable tools: adjusted statements, common-size statements, ratios and graphs. Ratios are an output of processing and an input to interpretation.
- Numbers are not the answer. Interpretation turns them into a conclusion or recommendation, communicated in a report that separates facts from opinions.
- Follow-up repeats the process periodically to update forecasts, reports and recommendations.
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