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China Finance Review International

ISSN : 2044-1398

Article publication date: 7 December 2021

Issue publication date: 1 February 2022

The literature on financial statement analysis attempts to improve fundamental analysis and to identify market inefficiencies with respect to financial statement information.

Design/methodology/approach

In this paper, the author reviews the extant research on financial statement analysis.

The author then provides some preliminary evidence using Chinese data and offer suggestions for future research, with a focus on utilising unique features of the Chinese business environment as motivation.

Originality/value

The author notes that there has been no work that the author could locate specifically on Chinese FSA research. The unique business environment in China, relative to the US where the vast majority of this work has been conducted, should motivate any studies, especially given the author documents the robust finding in terms of the mean reversion in profitability.

• Financial statement analysis
• Fundamental analysis
• Forecasting
• Persistence
• Mean reversion

Jackson, A.B. (2022), "Financial statement analysis: a review and current issues", China Finance Review International , Vol. 12 No. 1, pp. 1-19. https://doi.org/10.1108/CFRI-10-2021-0208

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Financial Statement Analysis: How It’s Done, by Statement Type

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

Key Takeaways

• Financial statement analysis is used by internal and external stakeholders to evaluate business performance and value.
• Financial accounting calls for all companies to create a balance sheet, income statement, and cash flow statement, which form the basis for financial statement analysis.
• Horizontal, vertical, and ratio analysis are three techniques that analysts use when analyzing financial statements.

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How to Analyze Financial Statements

The financial statements of a company record important financial data on every aspect of a business’s activities. As such, they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United States. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP, which requires accrual accounting. Private companies have greater flexibility in their financial statement preparation and have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis , vertical analysis , and ratio analysis . Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets ,  liabilities , and  shareholder equity . Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit . It then moves to operating profit , which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the net income is reached.

Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.

Free Cash Flow and Other Valuation Statements

Companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company . Free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may keep a valuation statement as they progress toward potentially going public.

Financial statements are maintained by companies daily and used internally for business management. In general, both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall financial performance .

When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results. Finally, ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively.

Below is a breakdown of some of the most common ratio metrics:

• Balance sheet : This includes asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
• Income statement : This includes gross profit margin, operating profit margin, net profit margin, tax ratio efficiency, and interest coverage.
• Cash flow : This includes cash and earnings before interest, taxes, depreciation, and amortization (EBITDA) . These metrics may be shown on a per-share basis.
• Comprehensive : This includes return on assets (ROA) and return on equity (ROE) , along with DuPont analysis .

What are the advantages of financial statement analysis?

The main point of financial statement analysis is to evaluate a company’s performance or value through a company’s balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical, or ratio analysis, investors may develop a more nuanced picture of a company’s financial profile.

What are the different types of financial statement analysis?

Most often, analysts will use three main techniques for analyzing a company’s financial statements.

First, horizontal analysis involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods.

Second, vertical analysis compares items on a financial statement in relation to each other. For instance, an expense item could be expressed as a percentage of company sales.

Finally, ratio analysis, a central part of fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.

What is an example of financial statement analysis?

An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it generates profits and shareholder value. For instance, gross profit margin will show the difference between revenues and the cost of goods sold. If the company has a higher gross profit margin than its competitors, this may indicate a positive sign for the company. At the same time, the analyst may observe that the gross profit margin has been increasing over nine fiscal periods, applying a horizontal analysis to the company’s operating trends.

Congressional Research Service. “ Cash Versus Accrual Basis of Accounting: An Introduction ,” Page 3 (Page 7 of PDF).

Internal Revenue Service. “ Publication 538 (01/2022), Accounting Periods and Methods: Methods You Can Use. ”

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Introduction to Financial Analysis

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Kenneth S. Bigel, New York City, New York

Copyright Year: 2022

Publisher: Open Touro

Language: English

Formats Available

Conditions of use.

Table of Contents

• About the Author
• Author's Acknowledgements
• Open Touro Acknowledgements
• Chapter 1: Introduction
• Chapter 2: Financial Statement Analysis: The Balance Sheet
• Chapter 3: Financial Statements Analysis: The Income Statement
• Chapter 4: Financial Statements and Finance
• Chapter 5: Financial Ratios and Forecasting; Liquidity and Solvency Ratios
• Chapter 6: Profitability and Return Ratios, and Turnover
• Chapter 7: Market Ratios
• Chapter 8: Cash Flow, Depreciation, and Financial Projections
• Chapter 9: Corporate Forecasting Models
• Chapter 10: The Time Value of Money: Simple Present- and Future-Values
• Chapter 11: The Time Value of Money: Annuities, Perpetuities, and Mortgages
• Chapter 12: Fixed Income Valuation
• Chapter 13:  Interest Rates
• Chapter 14: Equity Valuation and Return Measurement

Ancillary Material

About the book.

This Open Textbook is a dynamic guide incorporating the essential skills needed to build a foundation in  Financial Analysis . Students and readers will learn how to insightfully read a Financial Statement, utilize key financial ratios in order to derive forward-looking investment-related inferences from the accounting data, engage in elementary forecasting and modeling, master the theory of the  Time Value of Money , and learn to price stocks and bonds in an environment in which interest rates constantly change. Ample problems and solutions, and review questions are provided to the student so that s/he can gauge his/her progress. This text will be continually updated in order to provide novel information and enhance students’ experiences.  

About the Contributors

Dr. Bigel was formerly a fixed income analyst in the International Banking Department of the Bankers Trust Company (now DeutscheBank), analyzing international wholesale loans and debt instruments, and a graduate of its Institutional Credit Training Program. He later was affiliated with the Ford Motor Company, conducting investment analysis and planned car profits analysis, annual budgeting, and strategic planning. Subsequently, he worked as a senior portfolio manager attached to the wealth management division of Prudential Securities. He was formerly registered under Series 3, 7, 15, 24, 63, and 65.

As an independent consultant, he was involved in numerous high-profile cases including Enron. Dr. Bigel has conducted executive education programs for Morgan Stanley Capital Markets, Merrill Lynch Capital Markets, UBS, Lehman Brothers, CIBC, G.X. Clarke & Co. (now part of Goldman Sachs), and China CITIC Bank. He currently serves on the Financial Industry Regulatory Association’s Board of Arbitrators.

His extensive published research relates to Financial Ethics and Moral Development, Behavioral Finance, and Political Economy. He has been teaching college and graduate level finance courses since 1989.

Dr. Bigel has been interviewed on American radio, was a visiting scholar at Sichuan University and at Xi’an Jiaotong University in China, and appeared on Chinese television. At Touro University, he is a member of the Faculty Senate, The Touro Academy of Leadership and Management, The Assessments Committee, and The Promotions Committee. He chairs the Integrity Committee at LCM.

His wife and their three children reside in New York City. He enjoys reading, playing 60’s guitar, seeing his students succeed professionally, and watching his kids grow.

Educational Background:

• Ph.D., (high honors) New York University, Steinhardt School of Culture, Education, and Human Development (Business Education and Financial Ethics)
• M.B.A., New York University, Stern School of Business (Finance)
• B.A. (honors), Brooklyn College of the City University of New York (Philosophy and Mathematics)
• CFP™, International Board of Standards and Practices for Certified Financial Planners
• Hebrew University of Jerusalem (one-year program)

Dr. Bigel welcomes questions and constructive suggestions. He can be reached at <[email protected]>.

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Impact of the use of cannabis as a medicine in pregnancy, on the unborn child: a systematic review and meta-analysis protocol

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Introduction The use of cannabis for medicinal purposes is on the rise. As more people place their trust in the safety of prescribed alternative plant-based medicine and find it easily accessible, there is a growing concern that pregnant women may be increasingly using cannabis for medicinal purposes to manage their pregnancy symptoms and other health conditions. The aim of this review is to investigate the use of cannabis for medicinal purposes during pregnancy, describe the characteristics of the demographic population, and to measure the impact on the unborn child and up to twelve months postpartum.

Methods and analyses Research on pregnant women who use cannabis for medicinal purposes only and infants up to one year after birth who experienced in utero exposure to cannabis for medicinal purposes will be included in this review. Reviews, randomised controlled trials, case–control, cross-sectional and cohort studies, that have been peer reviewed and published between 1996 and April 2024 as a primary research paper that investigates prenatal use of cannabis for medicinal purposes on foetal, perinatal, and neonatal outcomes, will be selected for review. Excluding cover editorials, letters, commentaries, protocols, conference papers and book chapters. Effects of illicit drugs use, alcohol misuse and nicotine exposure on neonate outcome will be controlled by excluding studies reporting on the concomitant use of such substances with cannabis for medicinal purposes during pregnancy. All titles and abstracts will be reviewed independently and in duplicate by at least two researchers. Records will be excluded based on title and abstract screening as well as publication type. Where initial disagreement exists between reviewers regarding the inclusion of a study, team members will review disputed articles’ status until consensus is gained. Selected studies will then be assessed by at least two independent researchers for risk bias assessment using validated tools. Data will be extracted and analysed following a systematic review and meta-analysis methodology. The statistical analysis will combine three or more outcomes that are reported in a consistent manner. The systematic review and meta-analysis will follow the PRISMA guidelines to facilitate transparent reporting [ 1 ].

Competing Interest Statement

The authors have declared no competing interest.

Funding Statement

This study did not receive any funding.

Author Declarations

I confirm all relevant ethical guidelines have been followed, and any necessary IRB and/or ethics committee approvals have been obtained.

The details of the IRB/oversight body that provided approval or exemption for the research described are given below:

The study will use ONLY openly available human data from studies published in biomedical and scientific journals.

I confirm that all necessary patient/participant consent has been obtained and the appropriate institutional forms have been archived, and that any patient/participant/sample identifiers included were not known to anyone (e.g., hospital staff, patients or participants themselves) outside the research group so cannot be used to identify individuals.

I understand that all clinical trials and any other prospective interventional studies must be registered with an ICMJE-approved registry, such as ClinicalTrials.gov. I confirm that any such study reported in the manuscript has been registered and the trial registration ID is provided (note: if posting a prospective study registered retrospectively, please provide a statement in the trial ID field explaining why the study was not registered in advance).

I have followed all appropriate research reporting guidelines, such as any relevant EQUATOR Network research reporting checklist(s) and other pertinent material, if applicable.

Data Availability

All data produced in the present work are contained in the manuscript.

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