International Financial Statement Analysis, 3rd Edition

CHAPTER 12

FINANCIAL STATEMENT ANALYSIS: APPLICATIONS

Thomas R. Robinson, CFA

Jan Hendrik van Greuning, CFA

Elaine Henry, CFA

Michael A. Broihahn, CFA

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• evaluate a company's past financial performance and explain how a company's strategy is reflected in past financial performance;
• forecast a company's future net income and cash flow;
• describe the role of financial statement analysis in assessing the credit quality of a potential debt investment;
• describe the use of financial statement analysis in screening for potential equity investments;
• explain appropriate analyst adjustments to a company's financial statements to facilitate comparison with another company.

1. INTRODUCTION

This chapter presents several important applications of financial statement analysis. Among the issues we will address are the following:

• What are the key questions to address in evaluating a company's past financial performance?
• How can an analyst approach forecasting a company's future net income and cash flow?
• How can financial statement analysis be used to evaluate the credit quality of a potential fixed-income investment?
• How can financial statement analysis be used to screen for potential equity investments?
• How can differences in accounting methods affect financial ratio comparisons between companies, and what are some adjustments analysts make to reported financials to facilitate comparability among companies.