Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information, by using
different
accounting
tools and techniques.
It consists of
1) reformulating
reported financial statements, 2) analysis and adjustments of measurement errors,
and 3) financial ratio analysis
on
the basis of reformulated
and adjusted
financial statements.
The first two are often dropped in practice, meaning that
financial ratios are just calculated on the basis of the reported numbers, perhaps with some adjustments. Financial statement analysis is the foundation for
evaluating and pricing credit risk and for doing fundamental company valuation.