Financial Statement Analysis
Framework
IRON LAW: Read All Three Statements Together
A company can be profitable (Income Statement) but cash-poor (Cash Flow Statement).
A company can have high assets (Balance Sheet) funded entirely by debt.
Reading one statement alone gives an incomplete — and potentially misleading — picture.
ALWAYS read all three and check for consistency.The Three Statements
Income Statement (損益表) — Did we make money THIS PERIOD?
- Revenue → Gross Profit → Operating Income → Net Income
- Key: Revenue recognition ≠ cash received. Accrual accounting records revenue when earned, not when paid.
Balance Sheet (資產負債表) — What do we own and owe RIGHT NOW?
- Assets = Liabilities + Shareholders' Equity
- Key: This is a SNAPSHOT at one point in time, not a period.
Cash Flow Statement (現金流量表) — Where did cash come from and go?
- Operating activities (core business cash generation)
- Investing activities (capex, acquisitions, asset sales)
- Financing activities (debt, equity, dividends)
- Key: Operating cash flow is the most important — it shows if the core business generates cash.
Red Flags Across Statements
| Red Flag | What It Means |
|---|---|
| Revenue growing but operating cash flow declining | Possible revenue recognition issues, rising receivables |
| Net income positive but free cash flow negative | Earnings driven by accruals, not cash; heavy capex |
| Assets growing faster than revenue | Inefficient asset utilization |
| Debt growing faster than equity | Increasing leverage risk |
| Inventory growing faster than revenue | Possible obsolescence, demand slowdown |
Analysis Steps
- Read Income Statement: Is the company profitable? At which level (gross, operating, net)?
- Read Balance Sheet: What's the capital structure? How liquid is it?
- Read Cash Flow: Is operating cash flow positive? Where is cash going?
- Cross-check: Revenue growth vs cash flow growth, net income vs operating cash flow
- Trend: 3-5 year trend for key metrics
- Benchmark: Compare to industry peers
Output Format
# Financial Statement Analysis: {Company} — {Period}
## Income Statement Highlights
| Metric | Current | Prior Year | Change |
|--------|---------|-----------|--------|
| Revenue | ${X} | ${X} | {%} |
| Gross Margin | {%} | {%} | {±pp} |
| Operating Margin | {%} | {%} | {±pp} |
| Net Income | ${X} | ${X} | {%} |
## Balance Sheet Highlights
| Metric | Current | Prior Year |
|--------|---------|-----------|
| Total Assets | ${X} | ${X} |
| Total Debt | ${X} | ${X} |
| D/E Ratio | {X} | {X} |
| Current Ratio | {X} | {X} |
## Cash Flow Highlights
| Category | Amount |
|----------|--------|
| Operating CF | ${X} |
| Investing CF | ${X} |
| Financing CF | ${X} |
| Free Cash Flow | ${X} |
## Red Flags
- {any detected}
## Overall Assessment
{Financial health verdict with key rationale}Gotchas
- Revenue ≠ cash: Under accrual accounting, revenue is recorded when earned (product delivered), not when cash is received. Check accounts receivable to see how much revenue is still uncollected.
- EBITDA is not cash flow: EBITDA ignores capex, working capital changes, and taxes — all of which are real cash costs. Use free cash flow for cash analysis.
- One-time items distort trends: Restructuring charges, asset sales, legal settlements create one-time spikes or dips. Use "adjusted" or "normalized" figures for trend analysis.
- Taiwan IFRS vs US GAAP: Taiwan-listed companies use IFRS (TIFRSs). Some treatment differs from US GAAP (lease accounting, revenue recognition details). Note which standard applies.
References
- For financial ratio analysis deep-dive, see the biz-financial-ratios skill
- For DuPont ROE decomposition, see the biz-dupont skill