Fundamental Analysis - Pillar 1 - Financial Analysis

Investofreaks!

Financial Analysis is one of the two Quantitative means to analyze a company. The other is Valuation Analysis. Its Quantitative hence very Objective number driven - numbers mostly dont lie and even if they do as a small retail investor, in most cases, we can build screening methods in our analysis to have checks to see if they are cooking the books of accounts. Also we have the market regulator SEBI who is also keeping an eye.

To know the 4 pillars to Fundamental Analysis click here

Financial Analysis constitutes the analysis of 3 Financial Statements:

1. Profit & Loss Statement (Income Statement)
2. Balance Sheet
3. Cash Flow Statement

If I am given 100 minutes to analyse all 3 statements and give a analysis report on the company, then I would spend 80% of the time on Balance Sheet and Cash Flow Statement. The reason I want to spend time this way is because "Cash is King" and these two statements tell me exactly this!

Profit & Loss Statement (P&L) (Income Statement) - Here we get answers to the following questions (not an exhaustive list)

• Is the company able to increase the sales of it products/services at a reasonable rate a.k.a Are the sales growing?
• While selling more are they able to maintain profitability if not increase?
• Do the products of the company have a seasonal demand within a 12 month time frame?
• Is the company operating in a cyclical business? Please google what a cyclical business means! 
• Is the company paying corporate taxes per the rules of the government for the industry it operates in?
• Is the company paying a share of its profits to shareholders on a consistent basis? 

Non Finance folks can understand it this way to keep it simple - no rocket science!

The P&L statement tells us about the "financial performance" of the company, while the Balance sheet will tell you about the "financial position" of the company at a point in time and the Cash Flow Statement will tell you if the company is a "cash cow" (google this terms again, very important)

I will write another detailed post on "How to Analyze the P&L Statement" and which free tools on the internet you can use to keep it simple yet effective.

Adieu!