Financial Statement Analysis
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This chapter provides fundamental financial analysis based on ratio analysis, a powerful tool to assess the performance of a firm over a period, or to compare risk and return of firms of different sizes. The discussion centres on the income statement, the balance sheet, the statement of shareholders’ equity, and the cash flow statement and the capitalisation of off-balance obligations. These provide the credit analyst with information to calculate the ratios, which are usually grouped into four categories: profitability, asset utilisation and efficiency, liquidity, and debt and solvency. The ratio examples are based on actual financial reports. Calculated accurately and analysed carefully, financial ratios are revealing and predictive. But financial statements can also mislead with window dressing and fraudulent reporting. The chapter provides examples.