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

1. Read Income Statement: Is the company profitable? At which level (gross, operating, net)?
2. Read Balance Sheet: What's the capital structure? How liquid is it?
3. Read Cash Flow: Is operating cash flow positive? Where is cash going?
4. Cross-check: Revenue growth vs cash flow growth, net income vs operating cash flow
5. Trend: 3-5 year trend for key metrics
6. Benchmark: Compare to industry peers

Output Format

markdown
# 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