How to Write a Financial Statement Analysis

by Melanie J. Martin, studioD

A company's financial statements reveal how the company has performed over time -- if they're accurate. Managers or outside consultants often provide an analysis of these statements in the form of a written report to provide further insight on the data recorded in the financial statements. This analysis might clarify potential errors or point out recurring patterns in the company's finances, for instance, providing valuable feedback to guide future decisions. Keep your report concise -- three pages is a good length -- to make it reader-friendly.

Determine the time period you wish to analyze, then gather the company's financial statements from that time period. Arrange them neatly into folders labeled by year.

If you encounter any apparent errors or suspicious information as you review the financial statements, check the company's financial records to ensure the financial statements you're looking at are accurate. Consider verifying the financial records more thoroughly by checking them against evidence such as bank statements and receipts.

Calculate and graph the company's revenue from sales as well as its net profits. Then compare the company's spending against its revenue, computing the ratio of spending to sales. Consider how this ratio has changed each year, and predict what may have triggered the changes. Include this information in your report.

Assess the company's ratio of debt to assets. Explain in your analysis whether the company has a healthy debt-to-asset ratio. Also consider whether the company has an appropriate level of liquidity (the ability to turn assets into cash), which demonstrates the company's ability to pay its debts. Provide a rationale to explain your stance on the company's debt-to-asset ratio and level of liquidity.

Look at the net profits of other companies in the same industry and compare the given company's financial state to theirs. Based on the company's past and current performance as well as future plans, predict how it will compete financially in the field and make recommendations for more efficient management of its finances. As you assess the company's efficiency, also consider major factors such as how quickly it produces and sells inventory as well as its average time frame for collecting payments.

Prepare an introduction that voices your stance on the company's management of its finances. Then prepare a conclusion that summarizes how you recommend your audience use the information you've provided. If your audience consists of company management, for instance, state how you suggest they adapt their budget and practices. If working as an outside consultant to provide a report for shareholders, advise readers on what the stock is worth.

About the Author

Melanie J. Martin specializes in environmental issues and sustainable living. Her work has appeared in venues such as the Environmental News Network, "Ocean" magazine and "GREEN Retailer." Martin holds a Master of Arts in English.

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