Building Your Analysis Framework#

You've learned the components—now it's time to put them together into a systematic approach you can apply to any company. A consistent framework ensures you don't miss important issues and makes your analysis more efficient.

Your framework will evolve. Start with a basic structure and refine it over time as you learn what works for you and what questions matter most.

The Analysis Process#

Step 1: Business Understanding (Before the Numbers)#

Before diving into financials, understand the business:

Question	Why It Matters
What does the company do?	Context for all financial analysis
How does it make money?	Focus on key revenue drivers
Who are the competitors?	Benchmark for comparison
What are the risks?	Framework for evaluating stability
What's the growth strategy?	Context for investment analysis

Start With the Business

The best analysts understand businesses deeply. Numbers alone don't tell you if a company's strategy will succeed or if it has sustainable competitive advantages.

Step 2: Historical Analysis (3-5 Years)#

Review trends over time:

Income Statement:

Revenue growth rate
Gross margin trend
Operating margin trend
Net margin trend
EPS growth

Balance Sheet:

Asset growth
Debt levels
Equity growth
Working capital

Cash Flow:

Operating cash flow trend
Free cash flow trend
CapEx as % of revenue
Cash flow vs. net income

Step 3: Current Position#

Assess today's financial health:

Profitability: Are margins competitive? Liquidity: Can short-term obligations be met? Leverage: Is debt manageable? Efficiency: Are assets used productively? Cash Flow: Is the business generating cash?

Step 4: Quality Assessment#

Look beyond the surface:

Does cash flow support reported earnings?
Are there unusual items or accounting changes?
What's management saying vs. what numbers show?
Are there related party transactions?
Any red flags?

Step 5: Peer Comparison#

Put findings in context:

How do metrics compare to competitors?
Is the company gaining or losing ground?
What explains any differences?

Step 6: Form Conclusions#

Synthesize your findings:

What are the key strengths?
What are the main risks?
What's the overall financial health?
What questions remain?

Your Analysis Checklist#

Use this checklist as a starting point:

Business Overview#

Understand the business model
Identify main products/services
Know the competitive landscape
Understand industry dynamics

Income Statement Analysis#

Review revenue trends (3-5 years)
Calculate and trend gross margin
Calculate and trend operating margin
Calculate and trend net margin
Check for unusual items
Compare margins to peers

Balance Sheet Analysis#

Review asset composition
Check receivables relative to revenue
Check inventory relative to sales
Calculate current ratio
Calculate debt-to-equity
Review equity trends
Check for goodwill impairment risk

Cash Flow Analysis#

Review operating cash flow trend
Compare OCF to net income
Calculate free cash flow
Check FCF coverage of dividends
Review CapEx levels
Understand financing activities

Quality Checks#

Cash flow confirms earnings
Working capital trends reasonable
No major red flags
Accounting policies reviewed
Management discussion makes sense

Summary Assessment#

Key strengths identified
Key risks identified
Peer comparison completed
Overall conclusion formed

Resources for Analysis#

Primary Sources#

Source	What You Get
SEC EDGAR	Official filings (10-K, 10-Q, 8-K)
Company IR Website	Filings, presentations, transcripts
Earnings Call Transcripts	Management commentary and Q&A
Proxy Statements (DEF 14A)	Executive compensation, governance

Secondary Sources#

Source	What You Get
Yahoo Finance	Quick financial data overview
Financial News	Current events and analysis
Industry Reports	Market context and benchmarks
Analyst Reports	Professional analysis (with caveats)

Primary vs. Secondary

Always verify secondary sources against primary filings. Financial websites can have errors, and analyst reports come with their own biases.

Continuous Improvement#

Learn From Each Analysis#

After completing an analysis:

What did you learn?
What was difficult?
What would you do differently?
What questions do you wish you'd asked?

Track Your Record#

What did you get right?
What did you miss?
What would have helped?

Keep Learning#

Activity	Benefit
Read annual letters from great investors	Learn thinking frameworks
Study past failures and frauds	Learn what to watch for
Analyze companies across industries	Build pattern recognition
Discuss with others	Challenge your thinking

The Mindset for Success#

Patience#

Good analysis takes time. Don't rush to conclusions.

Humility#

You'll be wrong sometimes. Learn from mistakes rather than defending them.

Discipline#

Follow your framework consistently. Don't skip steps.

Curiosity#

Ask "why" constantly. Dig deeper when something doesn't make sense.

Independence#

Form your own views. Don't just follow the crowd.

You're Ready

You now have the knowledge to read and analyze financial statements. Like any skill, you'll improve with practice. Start analyzing companies—even if just for learning—and build your expertise over time.

Next Steps#

Practice: Analyze a company you know using this framework
Compare: Look at 2-3 competitors using the same approach
Refine: Adjust your checklist based on what you learn
Continue Learning: Explore advanced topics like valuation
Stay Current: Follow companies and industries that interest you

Key Takeaways

Develop a systematic, repeatable analysis process
Start by understanding the business before diving into numbers
Use a checklist to ensure consistency and completeness
Always compare to peers and industry benchmarks
Verify secondary sources against official filings
Learn from each analysis and track your record
Stay patient, humble, disciplined, and curious
Practice regularly—analysis is a skill that improves with use