Financial Statement Analysis Projects
Financial statements are a primary source of financial information for a company and are published in the annual report for review by investors and potential investors. Investment analysts and financial analysts determine investment projects based on analysis from the three main financial statements, which are the balance sheet, the income statement and the cash flow statement.
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Annual Report
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The first step in any financial statement analysis project is to obtain the financial statements, which are published in the annual report. Each annual report usually reports at least three years of balance sheet data and two years of income statement data. The cash flow statement is a mixture of both the balance sheet and the income statement and usually provides at least two years of data as well. The longer your project, the more annual reports you need to obtain. You can obtain an annual report by contacting the company's Investor Relations department or downloading one from the company's website.
Analysis Paralysis
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One of the most difficult aspects of financial statement analysis is determining what it is you want to know. Without a clear understanding for what it is you want to know, it's difficult to determine what you need to analyze. This is what leads analysts to experience what's known as analysis paralysis, or the inability to make any concrete recommendations due to an abundance of data or data overload.
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Ratios
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Identify ratios to use to support your claim. The best financial statement analysis provides the reader with concrete evidence for the direction or performance of a company. The type of ratio used depends on the purpose of the analysis. For instance, the most common ratios used in financial statement analysis for profitability are return on investment, or ROI; net income margin, which is net income divided by sales; and return on equity, or net income divided by stockholders' equity.
Recommendations
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Every financial analysis project must have clearly defined recommendations. If the analysis is dealing with profitability, provide the reader with clearly defined ratios that illustrate the actual state of profitability, as well as recommendations for what areas to focus on to improve profitability, such as the cost of inventory or the cost of operations or interest expense. Each analysis must provide the reader with a way to both understand what's going on and to come to conclusions about how to be better in the future.
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References
- Photo Credit Financial report image by janaka Dharmasena from Fotolia.com
