Lesson 2 of 6 · All lessons in this module
  1. The role of financial statement analysis
  2. The financial statement analysis framework
  3. Regulators, securities laws and regulatory filings
  4. Notes, segment reporting and management commentary
  5. Audit reports and internal control
  6. Reporting systems, changing standards and other information sources

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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