financial-statements

Financial statement analysis detects earnings quality risks by linking the income statement, balance sheet, and cash flow statement to compare accruals against cash generation and flag inconsistencies. It traces net profit into retained earnings and working capital to reveal discrepancies indicating weak earnings quality.

Financial fraud red flags in equity research include persistent negative operating cash flow with positive net profit, surging receivables outpacing revenue growth, high cash and debt combinations, unusual audit opinions, and capitalization or impairment risks. These warning patterns surface during three-statement consistency tests.

DuPont analysis decomposes return on equity into profitability, asset turnover, and leverage components to explain true performance drivers. It extends to a deeper multi-factor version, isolating which operational or financial factors drive ROE changes during equity research evaluations.

Reconcile cash flow with net profit by calculating the CFO to net profit ratio, comparing receivables growth against revenue trends, and evaluating cash flow health across reporting periods. These accrual-vs-cash checks aggregate into a trend-based earnings-quality score.

Three-statement linkage analysis evaluates both normal and suspicious reporting periods by testing consistency across income statements, balance sheets, and cash flow statements. It highlights discrepancies in CFO, CFI, and CFF categories that may indicate potential accounting manipulation signals.

The best way to evaluate cash flow reconciliation is tracing net profit flows into retained earnings, working capital movements, and cash reconciliation across operating, investing, and financing activities. This three-statement consistency test spots discrepancies indicating weak cash generation.