What is a financial analysis report and how to use one?


Financial analysis reports are produced by analysts to reflect the financial health of a company. This is done in order to recommend its shares to traders and investors (or not as the case may be). A covers the core of the company, what is its business and why it may be a good investment, or possibly is it overvalued.

In this article, we are going to look at the details of what a financial analysis report is, how to read a financial analysis document, how these reports can be used in your trading and investing decisions and the various sections that go into making up the financial analysis report.

financial analysis report

What is a financial analysis report?

A financial analysis report is created by an analyst by researching a company or corporate, typically with the aim of recommending its stock to traders and investors. The financial analysis report will cover the essence of the company in question, so that traders and investors appreciate how it does business, what are its competitive advantages and why it is a seen to be a solid investment. Financial analysis reports are carefully and painstakingly studied by investors, who require the information and data in order to make sound trading and investment decisions. A full and far-reaching financial analysis report will communicate in a precise and honest way both a company’s strengths and weaknesses in a document that appeals to investors as it contains a detailed assessment of the financial health of a corporate.

How to read a financial analysis report

To read a financial analysis report you have to have an understanding of the various sections of the document. We will explore these in more details below, but they would include an executive summary, company description, income statement, balance sheet, profit sheet and statement of cash flows. Although some understanding of the various terms is required, you do not have to be a qualified accountant or maths wizard to understand a financial analysis report. However, as with anything in trading and investing, some work will need to be done and some time and effort put in to be able to fully comprehend the differing aspects of the financial analysis document. Do not be daunted though, these terms can be learnt fairly quickly and before you know it, you will be able to read a financial analysis report and compare different reports from different companies. Here we will start to show you how.

How to use a financial analysis report

There are a number of ways that a financial analysis report can be used by a trader or investor.

The most obvious of these is to be able to make better and more informed judgments when investing in companies for the intermediate and longer-term. The financial analysis report will contain a significant amount of information on the company itself, including the financial analysis, alongside the health of the company with the industry and the strength maybe of the industry as a whole. The financial analysis not only shows the current financial position of the corporate, but also from where it has come and also projections of where it is going.  From all of this information, it is possible for you to make a more informed decision if you want to buy shares in the company, or maybe exit a long position, or even enter a short.

Another significant way to use a financial analysis report is when comparing a number of different companies. You have already decided to buy a stock in a particular industry, or to buy a portfolio of stocks across different countries. Financial analysis reports can help to decide on which stocks, by comparing similar stocks across an industry or across maybe different countries.

Finally, even if you are trading on a far shorter time horizon, a strong knowledge and understanding of financial analysis reports can help with short-term trading opportunities. For example, by researching the expected results of a company and by comparing to a financial analysis report, you may be able to take advantage of a very short-term trading opportunity when a company announces their earnings reports, which are scheduled events. This is falls into the category of event trading, as we looked at in our article on What are trading the news and trading events?

Sections of a financial analysis report

Here we will look at some of the different sections that will be seen in a financial analysis report, including:

  • Executive summary/ Company description
  • Income statement/ Profit sheet
  • Balance sheet/ Statement of net worth
  • Cash flow/ Statement of cash flows

The most important parts of the financial analysis report to review and understand are the income statement, balance sheet and cash flows.

Executive summary/ company description

Most financial analysis reports will start with an executive summary and/ or company description. This will be a top-level description of the company, that allows the report reader to quickly understand the business as a whole and the wider industry that the company sits in. It will also guide you to be able to appreciate why the company has any advantages over its competitors, how strong is the competition within the industry, any threats from substitute services or products, alongside important findings from the financial analysis within the report.

Income statement/ Profit sheet

An income statement is a very important part of any financial analysis report and makes up one of the three most significant aspects of the report. The others being the balance sheet and the cash flow, which we will look at below.

The income statement is also called the profit sheet and tells us the profit and loss of a company over a time period. This might be over a month, a quarter or a year. The main calculation is that net income, equals total revenue minus total expenses.

The income statement can give you an understanding of the efficiency of a company’s management, its operations and its performance within the industry. Importantly and as stated, the income statement gives the income over a time frame, whereas the balance sheet for example just gives the company’s position on a particular date. 

Balance sheet/ Statement of net worth

The balance sheet is also known as a statement of net worth, or a statement of financial position. It is the second of the three key factors in a financial analysis report we will look at here. The balance sheet shows a company’s total assets, and how these assets are financed, whether through debt or equity. It can. The fundamental equation that defines a balance sheet that assets = liabilities + equity.

A balance sheet is usually split into two sections. Generally, the left side of the balance sheet summarises the company’s assets. The right side of the balance sheet shows the company’s liabilities plus the equity of the shareholders.

In addition, the assets and liabilities are divided into two sections: current asset and liabilities and long-term assets and liabilities. There are various metrics in the balance sheet including leverage, liquidity and operational efficiency.

Cash flow statement/ Statement of cash flows

A cash flow statement is the third of the three key elements of a financial analysis report. It is also known as a statement of cash flows. A cash flow statement shows how much cash is generated and used over a given timeline.

The key areas seen on a cash flow statement are the company’s investing activities, operating activities, and financing activities.  The total amount of cash produced by and used by each of these three main activities is then added together to produce the total change in cash for the period being looked at. Then, this figure is added to the opening cash balance to produce the bottom line of the cash flow statement, which is the closing cash balance.

Financial analysis report summary

In this article on financial analysis reports we have looked at what a financial analysis report is and the various sections that go into making up the document. We have looked at how to read a financial analysis report, plus how these reports can be used in your trading and investing decisions.

The main takeaways from new or event trading are:

  • Financial analysis report knowledge is important for investing and trading alike, but particularly as an investor
  • You should certainly take the time to gain the understanding to be able to read a financial analysis report, as this can be an additional factor in your trading and investing decision making and strategy.

Editor in chief

Steve Miley is the Market Chartist and has 32 years of financial market experience and as a seasoned expert now has many responsibilities. He is the founder, Director and Primary Analyst at The Mar... Continued

Please comment below

Your email address will not be published. Required fields are marked *