Part 3: Financial Analysis Fundamentals

Financial analysis reveals a company's operational health through three fundamental lenses: liquidity, solvency, and profitability. While sophisticated financial models serve their purpose, mastering these core elements enables effective investment evaluation.

Liquidity analysis examines short-term survival capability. Cash position, burn rate, and working capital adequacy indicate a company's ability to fund operations and meet immediate obligations. Regular monitoring of anticipated capital expenditures provides context for liquidity requirements.

Solvency evaluation assesses long-term financial stability. Strategic debt can fuel growth, while operational debt often signals distress. The debt-to-equity ratio, interest coverage capacity, and debt maturity schedule reveal financial structure strength. Asset quality provides additional security context.

Profitability assessment requires sector-specific interpretation. Revenue growth patterns, gross margin sustainability, and operating efficiency vary significantly across industries. Customer concentration and revenue diversification influence long-term profitability potential.

Financial metrics demand validation against sector norms and business fundamentals. Comparing metrics to industry standards, evaluating projection reasonableness, and identifying accounting irregularities form essential analysis steps. Particular attention to changes in accounting methods, related party transactions, and non-GAAP metric reliance reveals potential concerns.

Unexpected changes in accounting practices, disproportionate accounts receivable growth, and frequent capital raising activities warrant detailed investigation. These indicators, when evaluated within sector context, help distinguish between sustainable business models and unsupported projections.