financial-statement-analyzer

What this skill does

# Financial Statement Analyzer

## Table of Contents
- [Example](#example)
- [Workflow](#workflow)
- [Common Patterns](#common-patterns)
- [Guardrails](#guardrails)
- [Quick Reference](#quick-reference)

## Example

**Scenario**: Technology company -- $2B revenue, $500M R&D, $100M annual operating lease payments

**Raw financials (as reported)**:
- Revenue: $2,000M
- COGS: $600M
- R&D expense: $500M (expensed entirely)
- SG&A: $300M
- Operating income (EBIT): $600M
- Interest expense: $40M
- Tax rate (marginal): 25%
- CapEx: $150M, Depreciation: $100M
- Change in working capital: +$30M
- Operating lease commitments: $100M/year for 5 years

**Adjustment 1 -- R&D capitalization** (5-year asset life):

| Year | R&D Spend | Amortization (1/5) |
|------|-----------|-------------------|
| Current | $500M | $100M |
| Year -1 | $450M | $90M |
| Year -2 | $400M | $80M |
| Year -3 | $350M | $70M |
| Year -4 | $300M | $60M |

- Total amortization of past R&D: $300M (sum of years -1 through -4)
- Research asset created: unamortized R&D on balance sheet = $1,100M
- Adjusted operating income: $600M + $500M (add back current R&D) - $400M (total amortization) = **$700M**
- Tax adjustment: additional tax on $100M uplift = $25M

**Adjustment 2 -- Operating lease conversion**:
- PV of lease commitments at 5% pre-tax cost of debt: ~$432M debt equivalent
- Reclassify $432M from operating expense to debt on balance sheet
- Adjusted operating income: add back lease expense ($100M), subtract depreciation of lease asset ($86M) = net +$14M
- Adjusted EBIT: $700M + $14M = **$714M**

**Adjusted financials**:
- Adjusted EBIT: $714M
- After-tax operating income: $714M x (1 - 0.25) = $536M
- Adjusted CapEx (including R&D CapEx): $150M + $500M = $650M
- Adjusted depreciation (including R&D amortization): $100M + $400M = $500M
- FCFF: $536M - ($650M - $500M) - $30M = **$356M**
- Adjusted debt: original debt + $432M lease debt
- ROIC: $536M / ($3,500M book capital + $1,100M research asset + $432M lease asset) = **10.6%**
- FCFE: $356M - $40M x (1 - 0.25) + ($200M net debt issued) = **$526M**

**Ratio dashboard**:

| Ratio | Reported | Adjusted |
|-------|----------|----------|
| Operating margin | 30.0% | 35.7% |
| ROIC | 12.9% | 10.6% |
| Debt-to-capital | 20.0% | 28.5% |
| Reinvestment rate | 14.9% | 28.0% |

The adjustments reveal that the company reinvests more heavily than reported figures suggest (R&D is investment, not expense) and carries more leverage once lease obligations are recognized as debt.

## Workflow

Copy this checklist and track progress:

```
Financial Statement Analysis Progress:
- [ ] Step 1: Collect raw financial statements
- [ ] Step 2: Identify and apply accounting adjustments
- [ ] Step 3: Compute free cash flows (FCFF and FCFE)
- [ ] Step 4: Calculate key financial ratios
- [ ] Step 5: Compare to industry benchmarks
- [ ] Step 6: Validate and document
```

**Step 1: Collect raw financial statements**

Gather the three statements: income statement, balance sheet, and cash flow statement. Record at least two years for trend analysis. See [resources/template.md](resources/template.md#financial-data-input-template) for data input fields.

- [ ] Income statement: revenue, COGS, operating expenses, R&D, SG&A, interest, taxes, net income
- [ ] Balance sheet: total assets, debt (short + long term), equity, cash, current assets/liabilities
- [ ] Cash flow statement: operating, investing, financing cash flows
- [ ] Supplemental: R&D expense history (5+ years), operating lease commitments, stock-based compensation

**Step 2: Identify and apply accounting adjustments**

Determine which adjustments apply based on company characteristics. See [resources/methodology.md](resources/methodology.md) for step-by-step procedures for each adjustment type.

- [ ] R&D capitalization: if R&D > 5% of revenue, capitalize and amortize over industry-appropriate life
- [ ] Operating lease conversion: if material lease commitments exist, convert to debt equivalent
- [ ] Stock-based compensation: treat as real operating expense (do not add back)
- [ ] One-time items: identify and normalize genuinely non-recurring charges
- [ ] Document each adjustment with before/after values and rationale

See [resources/template.md](resources/template.md#adjustment-documentation-template) for adjustment documentation format.

**Step 3: Compute free cash flows**

Calculate both FCFF and FCFE from adjusted figures. Verify they reconcile. See [resources/methodology.md](resources/methodology.md#free-cash-flow-computation) for detailed formulas and reconciliation.

- [ ] FCFF = After-tax operating income - (CapEx - Depreciation) - Change in non-cash working capital
- [ ] FCFE = Net income - (CapEx - Depreciation) - Change in WC - (Debt repaid - Debt issued)
- [ ] Reconciliation check: FCFE = FCFF - Interest(1-t) + Net debt change

**Step 4: Calculate key financial ratios**

Compute ratios from adjusted financials for a consistent picture. See [resources/template.md](resources/template.md#ratio-dashboard-template) for the full ratio dashboard.

- [ ] Profitability: operating margin, net margin, ROIC, ROE
- [ ] Leverage: debt-to-capital, interest coverage, debt-to-EBITDA
- [ ] Efficiency: reinvestment rate, sales-to-capital, asset turnover
- [ ] Liquidity: current ratio, quick ratio

**Step 5: Compare to industry benchmarks**

Place the company's adjusted ratios in context. See [Quick Reference](#quick-reference) for benchmark ranges by sector.

- [ ] Compare operating margin to sector quartiles
- [ ] Compare ROIC to sector median and to the company's own WACC
- [ ] Compare debt-to-capital to sector norm
- [ ] Flag ratios that are outliers (above 75th or below 25th percentile)

**Step 6: Validate and document**

Review completeness and consistency. Validate using [resources/evaluators/rubric_financial_statement_analyzer.json](resources/evaluators/rubric_financial_statement_analyzer.json). Minimum standard: average score of 3.5 or above.

- [ ] All adjustments documented with rationale
- [ ] FCFF and FCFE reconcile
- [ ] Ratios computed from adjusted (not raw) figures
- [ ] Industry comparison included

## Common Patterns

**Pattern 1: Tech Company (Heavy R&D)**
- **Key adjustments**: Capitalize R&D (asset life 2-3 years for software, 5-10 for biotech/pharma), treat SBC as real expense, capitalize software development costs
- **Typical profile**: High R&D-to-revenue (15-30%), low tangible assets, negative or low FCFF due to heavy reinvestment, high operating margins once R&D is capitalized
- **Watch for**: SBC that inflates cash flow from operations if added back, R&D history needed for capitalization schedule
- **Example sectors**: Software, semiconductors, pharmaceuticals, biotechnology

**Pattern 2: Capital-Heavy Company (Leases and CapEx)**
- **Key adjustments**: Convert operating leases to debt, separate maintenance CapEx from growth CapEx, analyze depreciation schedules
- **Typical profile**: Large fixed asset base, significant lease commitments (pre- or post-ASC 842), high depreciation, moderate margins
- **Watch for**: Accelerated vs straight-line depreciation effects, sale-leaseback transactions, capital vs operating lease classification under ASC 842
- **Example sectors**: Airlines, retail, telecom, real estate, shipping

**Pattern 3: Financial Services Company**
- **Key adjustments**: Debt is operational (raw material, not financing), use equity-only valuation (no FCFF), focus on book value and ROE, regulatory capital requirements
- **Typical profile**: High leverage by design, net interest margin as key metric, ROE rather than ROIC, provision for credit losses as major expense
- **Watch for**: Do not subtract debt from firm value (debt is not financial for banks). The `special-situations-valuation` skill handles this in depth.
- **Example sectors**: Banks, insurance, asset management, REITs

**Pattern 4: Cyclical Company (Earnings Normalization)**
- **Key adjustments**: Average earnings over ful