How We Analyse Financial Statements
Our approach comes from working with Australian businesses since 2019. We've learned what actually matters when looking at financial data—and what doesn't. Let's walk you through it.
Three Layers of Analysis
Most people look at a balance sheet and see numbers. We see patterns. After reviewing hundreds of statements for businesses across Sydney and Canberra, we've built a framework that looks at three things: liquidity, profitability, and operational efficiency.
But here's the thing—context matters more than the numbers themselves. A debt-to-equity ratio of 2.5 might be fine for a manufacturing business with solid assets. For a service company? That's a different conversation.
We start with the basics: current ratio, quick ratio, working capital trends. Then we dig into margins and turnover rates. Finally, we look at cash flow patterns because profit on paper doesn't pay invoices.
Eamon Sutherland
Senior Analyst
"I've been doing this since 2017, and I still find new patterns in statements. That's what keeps it interesting."
The Ratio Trap
Early in my career, I relied heavily on standard ratios. ROE, ROA, debt ratios—the classics. Then I worked with a retail client whose ratios looked terrible on paper but who had been consistently profitable for 12 years.
Turns out their business model involved rapid inventory turnover with thin margins. Their working capital was always tight by design. The ratios suggested problems that didn't exist.
Now we look at ratios as starting points, not conclusions. We compare them against industry benchmarks and historical trends for that specific business. Sometimes the story is in what changed, not what the current number shows.
Bronwyn Kettering
Methodology Lead
"Give me three years of statements and I'll show you where the opportunities are hiding."
Trend Analysis Over Time
A single financial statement is like one frame from a movie. You can see what's there, but you're missing the motion. We always request at least three years of data when possible.
We're looking for changes in gross margin over time. Is it improving? Declining? Stable? Same with operating expenses as a percentage of revenue. If someone's revenue grew 40% but their operating costs grew 60%, that's worth discussing.
Cash conversion cycles tell us how efficiently a business turns activity into actual money. We've seen companies with impressive revenue growth but deteriorating cash positions because their receivables kept climbing.
Our Five-Step Process
Initial Review
We scan for obvious red flags first. Negative working capital, declining cash reserves, unusual expense spikes. Takes about 20 minutes and catches most basic issues.
Ratio Calculation
We calculate 15 core ratios across liquidity, profitability, and efficiency categories. Then we compare them to industry standards and the business's own history.
Vertical Analysis
Every line item gets expressed as a percentage of total revenue or assets. This makes it easy to spot when something's consuming more resources than it should.
Horizontal Comparison
We track how each category has changed year over year. A 15% increase in administrative costs might be justified—or it might signal inefficiency creeping in.
Cash Flow Mapping
Finally, we follow the cash. Operating activities should generate positive flow. If a business is consistently funding operations through financing, we need to understand why.
Context Integration
Numbers don't exist in isolation. We factor in industry conditions, economic trends, and business strategy. A planned expansion explains certain financial patterns that might otherwise concern us.
What This Looks Like in Practice
We worked with a Canberra-based distributor in early 2024 who wanted to understand why their profits weren't translating to available cash. Here's what we found.
Receivables Issue
67 Days
Average collection period had stretched from 45 to 67 days over 18 months
Inventory Build
$340K
Stock levels increased significantly while turnover ratio declined
Cash Impact
$485K
Cash tied up in operations that could've been deployed elsewhere
The statements showed profitability, but the cash flow statement revealed the real story. They'd loosened credit terms to drive sales growth without adjusting their purchasing patterns. The solution wasn't complicated, but it wasn't obvious from looking at the income statement alone.