Financial statement analysis

This chapter provides readers with the skills and insights to enable a fuller understanding of a public company's underlying financial statements. Financial statement analysis is a form of fundamental analysis that identifies and analyzes the key financial information relevant to a company, for the purpose of determining the company's intrinsic value. This chapter concentrates on the calculation and application of the principal financial ratios for profitability, efficiency, liquidity, solvency, and investment potential. There is an effort to make the content accessible to readers on a practical level, by applying the various ratios to the real financial statements of Johnson & Johnson. While the chapter outlines in detail the quantitative calculations required to undertake financial statement analysis, there is a firm emphasis on the importance of context in properly applying these techniques. The establishment of trends, the comparison of data to benchmarks, and the consideration of strategic factors all form part of this holistic contextual analysis of financial statement information.