From acontextual to contextualized financial analysis

As we can see from the discussion above, analysis of a ratio can reveal important relations and bases of comparison in uncovering conditions. However, some analysts used it in a narrow acontextual manner. So, even the accounting data is reliable, the explanatory potential of ratio analysis is still severely limited. It can only describe the changes in financial numbers, but it can not explain why the changes happen. 9 Conversely, with contextualization, explanation of performance and levels of performance are illustrated best.

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Comparing with acontextual financial analysis in isolation explaining little about the company’s historic performance, contextualized analysis can give a rich explanation of past performance and of focusing analysis on a company’s possible future. 10 Clearly, the key of successful financial analysis is understanding the dynamics of corporate performance. In many situations, analysts are concerned with comparing the financial statement of companies from different countries.

For example, recently, US investors have had an increasing interest in foreign securities traded on foreign markets. Holding foreign stocks can help reduce invests’ risk by diversifying the investment portfolio included securities of companies from more than one countries. Mostly, financial information provided by the company is the base of the choice to buy or sell a foreign security for the investors. So, the investors have to challenge of analyzing and interpreting financial statements prepared according to foreign accounting.

Since the accounting system in a country is a product of the social, economic, political, and cultural environment, it is difficult to make meaningful comparison across companies in different countries. 11 An interesting research in this area is from the Choi et al. (1983). 12 Such as, raising capital through equity issuances in Japan is relatively unusual for a number of reasons, one of which is that the local banks and government play a particular role in providing debt capital.

Some research also reported Japanese managers are much less concerned with short term profits than U. S managers, and are likely to make investment that maximize long-term profitability. In general, they found Japanese were much higher rate and lower net income. Therefore, understanding the foreign environment in which a foreign company is based will achieve a successful of financial analysis. To sum up, this essay has discussed that accounting data itself alone is invaluable.

The lessons from MicroStrategy case have proved this point. Then, the essay has discussed how to make accounting figures more meaningful through analyzing ratio analysis, and found contextualized analysis is a better approach to achieve the goal of financial analysis by comparing with the acontextual analysis. We also have considered the international situation for foreign analysts. Finally, without doubt, contextualized analysing manner is necessary in the international situation.