Financial Statement Analysis

Financial statements are the primary information companies publish about themselves. Financial statement analysis is the method used by any interested party to answer questions about a company by extracting the information from company financial statements. Financial statement analysis mainly focuses on investors, since businesses are in business to make profits, financial statements are prepared with shareholders’ in mind. Much of financial statement analysis for investors is relevant to other parties. While the shareholder is concerned with profitability, governmental regulators, short and long term creditors, competitors, and employees are concerned with profitability also. There is also a concern with the riskiness of the business for stockholders’ and employees as well. For the purpose of this paper, I will focus on financial statement analysis in regard to shareholders and short and long term creditors. Stockholders’ (shareholders’) equity can be found on the balance sheet. It is the claim by owners, the residual claim on the assets after subtracting liability claims. This is important to stockholders because it shows the degree of which net operating assets are financed by common equity, financial leverage. The balance sheet is a statement of the company’s investments, from its investing activities, and the claims to the payoffs from those investments. Both assets and liabilities are divided into current and long-term categories, where “current” means that the assets will generate cash within a year, or that cash will be used to settle liability claims within a year. Companies rely on creditors to fund their business for various purposes. A company can use different suppliers of credit. These suppliers include public debt market investors (bondholders), commercial banks, other financial institutions such as