From the course: Accounting Foundations

Introduction to financial statement analysis

From the course: Accounting Foundations

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Introduction to financial statement analysis

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- So what is financial statement analysis? We'll begin our discussion by looking at a company most of us are familiar with, Target, a retailer. - In fiscal 2024, they reported income of over $4 billion. Now is that a lot? - At the end of February, 2024, they reported total assets of $55 billion. Is that a lot? What did they do with those assets? - At the end of February, 2024, they had liabilities of almost $42 billion. Now, is that a lot? And what did they use that money for? - To answer these and other questions, we'll need to carefully analyze Target's financial statements. - That brings us to financial statement analysis, which is simply the examination of relationships among financial statement numbers. - We're going to do a lot of dividing one number by another to draw our conclusions. - Now, when it comes to ratio analysis, we're going to do two types. One, we're going to compare the same company across time to see how the company has performed over time. - And secondly, at the same point in time, we're going to compare across companies. For example, let's continue with Target. - In fiscal 2023, Target had a return on sales of 2.6%. Return on sales is simply net income divided by sales. It's a measure of how much profit they earned per dollar. - In fiscal 2024, they had increased to 3.9%. The obvious question, why? How did that happen? - Now, let's compare Target to Walmart. During fiscal 2024, Walmart had a return on sales of 2.8%. Again, target had a return on sales of 3.9%. So what has happened to Target from 2023 to 2024? And during 2024, why is Target so much more profitable than Walmart? Those are good questions, and we're going to address how to answer questions like these. - Now, when it comes to financial statement analysis, I like to borrow a quote from Winston Churchill. He said, the following, "The farther backward you can look, the farther forward you can see." - We analyze financial statements to tell us if a company has done well or poorly in the past, and to help us see how the company might do in the future. - With financial statement analysis, you can begin to spot trends in the financial statement data that provide clues as to what the future might hold. You can start to see how past decisions have affected the financial statements, and how decisions made now might affect the statements of the future. - Financial statement analysis is the process of using the relationships among a company's financial statement numbers to gain insights into that company's operations, past, present, and future.

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