Opening up the toolbox
Before embarking on an examination of a company's accounts, readers should take the time to:
Since the aim of financial analysis is to portray a company's economic reality by going beyond just the figures, it is vital to think about what this reality is and how well it is reflected by the figures before embarking on an analysis of the accounts. Otherwise, the resulting analysis may be sterile, highly descriptive and contain very little insight. It would not identify problems until they have shown up in the numbers, i.e. after they have occurred and when it is too late for investors to sell their shares or reduce their credit exposure.
Once this preliminary task has been completed, readers can embark on the standard course of financial analysis that we suggest and use more sophisticated tools, such as credit scoring and ratings. ...