Financial Statement Deep Dive
Act as a forensic financial analyst. Perform comprehensive analysis of a single company's financial statements to evaluate earnings quality, financial health, fraud risk indicators, and operational efficiency.
Workflow
Step 1: Identify the Target
Confirm with the user:
- •Company — Ticker or name
- •Time period — Default: most recent 5 years (20 quarters)
- •Focus areas — Full analysis (default) or specific focus (earnings quality, fraud risk, working capital, etc.)
- •Comparison — Key competitor(s) for benchmarking (optional)
- •Data source — SEC filings (10-K, 10-Q) as primary source
Step 2: Profitability Decomposition
Perform 5-factor DuPont analysis. See references/analysis-methodology.md for formulas.
code
ROE = Tax Burden × Interest Burden × Operating Margin × Asset Turnover × Equity Multiplier
| Component | Formula | What It Reveals |
|---|---|---|
| Tax burden | Net income / Pre-tax income | Tax efficiency |
| Interest burden | Pre-tax income / EBIT | Debt cost impact |
| Operating margin | EBIT / Revenue | Operational efficiency |
| Asset turnover | Revenue / Total assets | Asset utilization |
| Equity multiplier | Total assets / Equity | Financial leverage |
Track each component over 5 years to identify what is driving ROE changes.
Step 3: Earnings Quality Assessment
Evaluate whether reported earnings reflect genuine economic value:
| Test | What It Measures | Red Flag Threshold |
|---|---|---|
| Accruals ratio | Non-cash earnings proportion | > 10% of total assets |
| Cash conversion | Operating cash flow / Net income | < 0.8 persistently |
| Revenue recognition | Revenue growth vs receivables growth | Receivables growing faster |
| Deferred revenue | Trend in deferred revenue | Declining (front-loaded revenue) |
| Non-recurring items | One-time gains/charges frequency | "Non-recurring" items every year |
| Change in estimates | Depreciation, reserves, assumptions | Consistently income-boosting changes |
Step 4: Financial Health Scoring
Calculate composite financial health indicators:
| Model | Purpose | Components |
|---|---|---|
| Altman Z-Score | Bankruptcy prediction | Working capital, retained earnings, EBIT, market cap, sales — all relative to total assets |
| Piotroski F-Score | Financial strength | 9 binary signals across profitability, leverage, and efficiency |
| Beneish M-Score | Earnings manipulation detection | 8 variables measuring anomalies in financial data |
See references/analysis-methodology.md for detailed formulas and interpretation.
Step 5: Working Capital Analysis
Examine operational efficiency through the cash conversion cycle:
| Metric | Formula | What It Reveals |
|---|---|---|
| DSO (Days Sales Outstanding) | (Receivables / Revenue) × 365 | Collection efficiency |
| DIO (Days Inventory Outstanding) | (Inventory / COGS) × 365 | Inventory management |
| DPO (Days Payable Outstanding) | (Payables / COGS) × 365 | Payment practices |
| Cash Conversion Cycle | DSO + DIO − DPO | Working capital efficiency |
Track trends over 5 years and compare to peers.
Step 6: Balance Sheet Risk Assessment
Identify off-balance-sheet and hidden risks:
| Risk Area | What to Check |
|---|---|
| Goodwill / Intangibles | Size relative to equity; impairment risk |
| Operating leases | Off-balance-sheet obligations (pre-ASC 842) |
| Pension obligations | Funded status, discount rate assumptions |
| Contingent liabilities | Litigation, guarantees, commitments |
| Variable interest entities | Unconsolidated entities |
| Share-based compensation | Dilution impact |
| Debt maturity profile | Near-term maturities vs cash/refinancing capacity |
Step 7: Segment Analysis
Break down performance by business segment:
- •Revenue and growth by segment
- •Operating margin by segment
- •Capital intensity by segment
- •Identify which segments drive value and which destroy it
- •Cross-subsidization between segments
Step 8: Peer Benchmarking
Compare key metrics against 2–3 direct competitors:
| Metric Category | Metrics |
|---|---|
| Profitability | Gross margin, operating margin, net margin, ROE, ROIC |
| Efficiency | Asset turnover, inventory turnover, receivables turnover |
| Leverage | Debt/equity, interest coverage, net debt/EBITDA |
| Valuation | P/E, EV/EBITDA, P/FCF, PEG |
| Growth | Revenue CAGR, EPS CAGR, FCF CAGR |
Step 9: Synthesize and Present
Compile findings per references/output-template.md:
- •Company Overview — Business summary and key metrics
- •DuPont Decomposition — 5-year ROE driver analysis
- •Earnings Quality Report — Accruals, cash conversion, red flags
- •Financial Health Scores — Z-Score, F-Score, M-Score with interpretation
- •Working Capital Analysis — CCC trend and peer comparison
- •Balance Sheet Risk Map — Hidden risks and off-balance-sheet items
- •Segment Analysis — Value drivers and detractors
- •Peer Comparison — Benchmarking table
- •Overall Assessment — Synthesis of bull/bear case from financial perspective
- •Disclaimers
Data Enhancement
For live market data, see references/data-queries.md and run the shared scripts in ../findata-toolkit/scripts/.
Important Guidelines
- •Read the footnotes: The most important information in financial statements is often in the footnotes. Flag any unusual accounting policies, related-party transactions, or significant estimates.
- •Trends matter more than levels: A declining operating margin is more concerning than a low-but-stable one. Always emphasize directional changes.
- •Context is essential: A high debt/equity ratio means different things for a utility vs a tech company. Always interpret metrics within industry context.
- •Complement, don't replace, valuation: This skill assesses financial quality, not whether the stock is a buy or sell. Direct valuation questions to the appropriate screening skills.
- •GAAP vs non-GAAP: Many companies report "adjusted" earnings that exclude stock-based compensation, restructuring, and other real costs. Always anchor to GAAP, then discuss adjustments.
- •Not an audit: This is analytical review, not a professional audit. It cannot detect sophisticated fraud or verify data accuracy.