| name | financial-analysis |
| description | Financial statement analysis methodology covering the income statement, balance sheet, and cash flow statement, plus ratio analysis and trend interpretation for assessing a company's health. |
Financial Statement Analysis
Use this skill when evaluating a company's financial health from its statements.
The aim is a defensible read on profitability, liquidity, solvency, and trend,
grounded in the numbers rather than narrative.
Methodology
- Read the three statements together. The income statement shows
performance over a period, the balance sheet shows position at a point in
time, and the cash flow statement reconciles earnings to actual cash. Never
judge profit without checking whether it converts to cash.
- Normalize. Strip out one-time items, restatements, and accounting changes
so period-over-period comparisons are like-for-like.
- Compute key ratios.
- Profitability: gross margin, operating margin, net margin, return on
equity and return on assets.
- Liquidity: current ratio and quick ratio.
- Solvency / leverage: debt-to-equity and interest coverage.
- Efficiency: inventory turnover, receivables days, asset turnover.
- Analyze trend and context. Compare at least three periods to reveal
direction, and benchmark against industry peers — a ratio is only meaningful
relative to history and comparables.
- Check cash quality. Compare operating cash flow to net income and watch
free cash flow; persistent gaps signal aggressive accounting or distress.
Output
State the headline assessment, support it with the most diagnostic ratios and
their trend, call out red flags (declining margins, rising leverage, weak cash
conversion), and note the limitations of the available data.
