Analyzing Financial Statements — What is your perspective?? — Part1Kapil
Analyzing and trying to get insights from Financial Statement is one of the most interesting aspect. A Financial Statement can be dissected in many ways. Here are 6 different lenses from which the financial statements can be looked into…..
A banker is concerned about the company’s ability to satisfy its loan obligations. Concern about the composition of company’s financing sources is twofold. First, the greater is owner financing, the lower is a banker’s credit risk.
Second, creditors are also concerned with Adaptec’s other current and future creditor financing. Creditors often write debt covenants to restrict a company’s future lending, or require collateral in case of default, or limit the amount of dividends payable to shareholders.
As an investor, your review of financial statements focuses on company’s ability to create and maintain future net income. All the statements are important in your review. The income statement is especially important as it reveals management’s current and past success in creating and sustaining income. The cash flow statement is important in assessing management’s ability to meet cash payments and the company’s cash availability. The balance sheet shows Adaptec’s asset base from which future income generated, and reports on liabilities and their due dates to creditors.
As a member of a company’s board of directors, you are responsible for oversight of management and the safeguarding of shareholders’ interests. Accordingly, a director’s interest in the company is broad and risky. To reduce risk, a director uses financial statement analysis to monitor management and assess company profitability, growth, and financial condition. Because of a director’s unique position, there is near unlimited access to internal financial and other records. Analysis of financial statements assists our director in (1) recognizing causal relations among business activities and events, (2) “seeing the forest through the trees,” that is, helping directors focus on the company, and not on a maze of financial details, and (3) encouraging proactive and not reactive measures in confronting changing
—- Continued in Part II