CFA® Financial Statement and Analysis

Summary, Syllabus, and Topics (L1, L2, L3)

Financial analysis assesses a company's performance in relation to its industry and economic environment to make an investment recommendation or decision. Financial analysts' opinions and recommendations frequently concern giving capital to businesses—specifically, whether to invest in their issues of debt or equity and at what price. A debt securities investor is concerned about the company's ability to pay interest and repay the amount borrowed. An equity securities investor is a firm owner with a residual interest, who is concerned about the company's ability to pay dividends and to realize an increase in value and stock price.

Overall, financial analysis evaluates a company's ability to create a return on capital that is at least equivalent to the cost of that capital, grow its activities profitably, and create enough cash to satisfy obligations and pursue opportunities.

The information obtained from a company's financial reports is the starting point for fundamental financial analysis. These financial reports include audited financial statements, regulation-required additional disclosures, and any accompanying (unaudited) management commentary.

Study Tips for the CFA Financial Statement Analysis

Here are some hints/steps when reviewing financial statements:

  • Clearly state the analysis' goal and context: Define the target audience, timeline, and primary topic of the analysis.
  • Gather information: Gather the information needed to respond to the questions posed in step 1.
  • Data processing: To synthesize the data, perform computations and create charts or other outputs.
  • Examine and understand the information: Examine the data and draw conclusions or make recommendations based on it.
  • Conclusions and recommendations should be developed and communicated.
  • Follow-up: Update and evaluate the data on a regular basis to see if it still supports the initial conclusion.
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