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.


  • Evaluating a company's historical performance addresses not only what happened but also the causes behind the company's performance and how the performance reflects the company's strategy.
  • The projection of a company's future net income and cash flow often begins with a top-down sales forecast in which the analyst forecasts industry sales and the company's market share. By projecting profit margins or expenses and the level of investment in working and fixed capital needed to support projected sales, the analyst can forecast net income and cash flow.
  • Projections of future performance are needed for discounted cash flow valuation of equity and are often needed in credit analysis to assess a borrower's ability to repay interest and principal of a debt obligation.
  • Credit analysis uses financial statement analysis ...

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