Lesson 1 of 6 · 11 min
The role of financial statement analysis
Financial statement analysis combines a company's reports with other information to judge its past and present performance and position, so the analyst can form expectations about the future and make investment, credit and other economic decisions.
In short
- The role of financial statement analysis: use company reports plus other information to evaluate past, current and potential performance and financial position for investment, credit and other economic decisions.
- The aim is forward-looking. History is studied to form expectations about future performance and position, and about the risks around them.
- Equity investors focus on profitability and per-share value; debt investors focus on the ability to pay interest and repay principal.
- A central question: can the company earn a return on capital at least equal to its cost of capital, grow profitably and generate enough cash?
- Performance covers profitability (earning a profit) and cash flow generation (receipts exceeding disbursements). Financial position matters most for credit decisions.
- Managers also analyse their company, but they have nonpublic information, so they do not depend only on published statements.
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