Effective financial statement analysis should be balanced on a three legged stool:
Economics
Identify economic characteristics of the industries in which a firm participates and the relation of these economic characteristics to various financial ratios.
Strategy
Describe the strategies that a firm pursues to differentiate itself from competitors as a basis for evaluating a firm's competitive advantages, the sustainability of a firm's earnings and it's risks.
Accounting
Evaluate the financial statements, including the accounting concepts and methods that underlie them and the quality of the information they provide.
Source: Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2011). Financial reporting, financial statement analysis, and valuation: A strategic perspective. Mason, OH: Thomson/South-Western.
