1. Acquire your company’s financial statements for at least two recent years

2. Give a brief overview about your company (include which reporting standards are used)

3. Start with scanning all of the statements to look for large movements in specific items from one year to the next. For example: Did revenues soar or fall from one year to the next? Did total or fixed assets grow or fall? If you find anything that looks suspicious, research the information you have about the company to find out why. (For example: Did the company purchase a new division, or sell off part of its operations, that year?)

4. Review the notes accompanying the financial statements for additional information that may be significant to your analysis. Some of the items commonly found in the notes are: an explanation of the accounting methods used for depreciation, contingent liabilities or assets/litigations, etc.

5. Examine the balance sheet. Look for large changes in the overall components of the company’s assets, liabilities or equity. For example, have fixed assets grown rapidly in one or two years, due to acquisitions or new facilities? Has the proportion of debt grown rapidly, to reflect a new financing strategy?

6. Examine the income statement. Look for trends over time. (for example: trends of Revenues (sales) and Net income (profit, earnings) over the past several years. Are revenues and profits growing over time? Are they moving in a smooth and consistent fashion or more erratically?

7. Look for non-recurring or non-operating items. These are “unusual” expenses not directly related to ongoing operations. Does your company have them? If yes, why?

8. Examine the shareholder’s equity statement. Has the company issued new shares, or bought some back? Has the retained earnings account been growing or shrinking? Why? Are there signals about the company’s long-term strategy here?

10.Analyze the financial statements by computing ratios. The most frequently used ratios provide insights into your company’s

11. Use trend analysis to evaluate both the income statement and the balance sheet. Compare the rate of increase or decrease of various account classifications within each financial statement.

12. For each of the key expense components on the income statement, calculate them as a percentage of sales/revenues for each year you have information available. (For example, calculate the percent of cost of goods sold over sales, general and administrative expenses (G&A) over sales, and research and development over sales. Look for favorable or unfavorable trends. For example, rising G&A expenses as a percent of sales could mean generous spending. Check whether the spending trends support the company’s strategies, e.g., increased emphasis on new products and innovation will probably be reflected by an increased proportion of spending on research and development.)

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