MGT 137 - Week 1What is Financial Statement Analysis (FSA)?

What is Financial Statement Analysis (FSA)?

Using financial statements to understand how a company works, how profitable and risky it is, and how much it’s worth.

How is FSA different from accounting?

Accounting records transactions; FSA interprets financial statements to understand the business and its economics.

What is the main goal of FSA?

To understand firm value and support better investment, lending, and management decisions.

Who uses financial statement analysis?

Investors, analysts, managers, lenders, suppliers, and customers.

Why is FSA especially important today?

There are fewer public companies, but they are much larger and more powerful.

What are the six steps in financial analysis?

1) Analyze industry

2) Identify company strategy

3) Assess financial statement quality

4) Analyze profitability and risk

5) Forecast future performance

6) Value the firm

What does the course focus on first: past or future performance?

First past/current performance, then future performance.

What is the 4-Box Framework?

A way to analyze a company by looking at four areas and checking if they align.

What are the four boxes?

1) Management

2) Industry & Strategy

3) Compensation & Governance

4) Financial Results

Why is alignment across the four boxes important?

Strong companies have strategy, leadership, incentives, and financial results that all support each other.

What are you looking for when analyzing management?

Experience, leadership quality, consistency, priorities, and long-term thinking.

Why does a founder-CEO matter?

Founders often think long-term and care deeply about the company’s success.

Why are shareholder letters important?

They reveal management’s priorities, culture, and long-term strategy.

What does “Day 1” mean at Amazon?

Always act like the company is just starting — stay innovative, long-term focused, and customer-obsessed.

What does industry analysis help you understand?

Competition, growth potential, risks, and long-term profitability.

What are the key questions in strategy analysis?

• How does the company compete?

• Where does growth come from?

• What are the risks?

What are the main competitive factors for Amazon’s retail business?

Selection, price, and convenience.

Why does Amazon invest heavily in infrastructure?

High upfront costs create scale advantages and long-term competitive benefits.

What is a business segment?

A part of a company with its own revenues, expenses, and performance tracking.

Why is segment reporting useful?

It shows which parts of a company drive growth, profits, and risk.

What is a key limitation of segment reporting?

Lack of comparability across firms because segments are defined differently.

What is a 10-K?

A required annual report that gives detailed information about a public company.

What does Item 1 (Business) explain?

What the company does, how it makes money, and who it competes with.

What is Item 1A (Risk Factors)?

A list of major risks that could harm the company.

Why are changes in risk factor wording important?

Small changes can signal new or growing risks.

What is Item 7 (MD&A)?

Management’s explanation of financial performance and future outlook.

Why is MD&A especially important?

It reveals management’s perspective, tone, and concerns beyond the numbers.

What is corporate governance?

The system that monitors management and protects shareholders.

Why do executive incentives matter?

Executives behave based on how they are paid.

Why is stock-based compensation important?

It aligns executives’ wealth with shareholder value.

Why does Amazon avoid short-term performance bonuses?

Short-term profits discourage experimentation and innovation.

What is the purpose of long vesting periods for stock awards?

Encourage long-term thinking and employee retention.

Why is board independence important?

Independent directors are better monitors of management.

What is a blockholder?

A shareholder who owns a large percentage of the company and can influence decisions.

Why are institutional investors like BlackRock important?

They actively monitor management and push for long-term value.

What does strong revenue growth indicate?

Market demand and successful strategy.

Why is operating cash flow important?

It shows how much real cash the business generates.

Why is profitability by segment important?

Some segments fund others and drive future value.

Why do analysts use alternative data?

To predict performance before financial statements are released.

Examples of alternative data?

Satellite images, credit card data, geo-location, electricity usage.

What is the central question of FSA?

Does the company create long-term shareholder value?

Why is sustained superior performance hard?

Competition eventually erodes advantages.

What does it mean when “all the pieces fit together”?

Strategy, management, incentives, and financial results all reinforce each other.

In one sentence, what is Financial Statement Analysis?

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Financial Statement Analysis connects strategy, management, incentives, and financial results to understand whether a company creates long-term value.