financial-statement-analysis

# Financial statement analysis The statements tell you what happened. Analysis tells you why, and whether it continues. ## Read the three statements against each other A single statement is almost never enough. The income statement reports profit, the cash flow statement reports cash, and the gap between them is usually the story. - **Net income rising while operating cash flow falls** is the signal worth chasing first. It means working capital is absorbing the growth, or revenue is being recognized ahead of collection. - **The balance sheet is a point in time**; the other two cover a period. Comparing a period figure to a point-in-time balance without averaging the balance overstates efficiency ratios. - **Read the notes.** Concentration of customers, debt maturities, commitments, related parties, and subsequent events routinely matter more than anything on the face of the statements. ## Do fluctuation analysis before you compute a single ratio Compare against the prior period **and** against budget. They answer different questions: prior period tells you what changed, budget tells you whether you understood your own business. - **Set a threshold in both currency and percent.** Percent alone sends you chasing large swings on small accounts; currency alone hides a small account that doubled. - **Explain with a driver, not a restatement.** "Revenue up 12%" is the observation, not the explanation. Volume, price, mix, timing, and one-off items are explanations. ...