Interpreting financial statements

Analysis of company financial statements is a topic that is well covered in the financial literature. Unfortunately, the interpretation of the analysis is often neglected as a scientific approach to interpretation seems to be elusive. This paper attempts to provide a methodology whereby insight into the financial performance of a company can be obtained by proposing the “proportion model. The model recalculates certain financial statement figures to what it could have been, had the company been managed in a balanced position. By comparing the actual financial statement to the recalculated figures, an opinion regarding the financial performance is obtained. As an example, the model is applied to the 1999 Enron financial figures.