No Sense in Numbers

For the longest time, this blogger thought that the interpretation of financial statements was a lost art. Living in the Malaysian state of Sarawak, in Borneo, nobody within reach seemed to be able to explain what the missing link to my understanding was!

Was it something that would take an eternity to learn? Was a quantative type analysis of numbers significantly different from a qualitative type analysis?

Indeed, there didn't seem to be a magic formula for the interpretation of financial statements. No single rule of thumb. No magic wand. Artificial intelligence did not (yet) provide the answer anyway!

Cause and Effect

In the an old book I found, the Meaningful Interpretation of Financial Statements; the Cause and Effect Ratio Approach, one actually finds answers to how to derive meaning from all the numbers that one encounters in a financial statement.

Almost like a doctor attending to a patient, much of the meaningful interpretation of financial statements comes from deciding which numbers are causing a certain performance, and which numbers are simply symptomatic.

Does it make sense, for example, that company profitability ratios are driven in some part by company efficiency ratios?

In time, a story actually develops out of the many ratios and numbers that one dissects. (Failing which, it is actually even possible to forensically decide which numbers are fudged or forged, based on whether the ratios or numbers inspected make sense or not. Red flags in the accounting numbers would suggest that a more thorough inspection is required to determine if the numbers can be believed.)

The Book

To discuss the book, written by Donald E. Miller, leave a comment, question or like in the comments section below. The book is recommendable, if one can get one's hands on it. It was published in 1972.