A decade ago, financial statement analysis and interpretation software was a mere concept. Today, it’s a powerful tool for firms across the financial services industry. Before we delve into its capabilities, let’s clarify what financial analysis and interpretation entails.
Financial analysis involves interpreting financial statements to understand a company’s financial position and prospects. Analysts can gauge a company’s cash flow and growth potential by analysing key metrics (e.g. revenue growth, profit margin, earnings per share, etc.).
The problem with financial analysis is that it is highly time-consuming. With new strides in financial statement analysis and interpretation software – such as the inclusion of AI and machine learning algorithms – traditional financial statement software will likely become obsolete. Assuming these AI-powered financial analysis tools work, that is.
We’ve written about how many AI-powered tools are not meant to replace traditional financial software. Let’s just say there’s no risk of Excel becoming obsolete anytime soon. But AI tools can help collect, prepare, interpret and present data from financial analysis.
Of course, to correctly harvest and analyse financial data, AI must be able to think like an analyst. ChatGPT and particularly its latest iteration, GPT-4o are effective at understanding how financial information interacts on the page. For example, we asked it to analyse this balance sheet from Apple.
Note: Beginning the prompt with ‘you are a financial analyst’ yields a more detailed exploration of the ratios than simply asking it to conduct a financial analysis. Proof:
Thinking like an analyst involves more than just calculating ratios, however. The Association of Chartered Accountants (ACCA) notes that when interpreting a financial statement under exam conditions: “What sets a good answer apart from a poor one is the discussion of possible reasons for why changes in the ratios may have occurred (specifically in the given scenario) and arriving at an appropriate conclusion”.
In other words, financial analysis tools differ from human analysis because they have a robust understanding of why ratios have changed. Understanding the factors underpinning such changes involves commercial awareness and a strong analysis of how individual ratios affect a company’s financial position. Though AI-powered tools like ChatGPT can speculate about the causes, it takes financial acuity and experience to pinpoint what is (or isn’t) a financial red flag. We like the book The Signs Were There by Tim Steer, which explores how companies disguise worrying facts in their financials.
Specialised AI-powered tools designed to streamline key aspects of financial analysis and interpretation will likely be more valuable than generic AI platforms. For example, we found that LLMs like ChatGPT generate errors at a rate of approximately one per page – read more about our testing here. Financial tools will have validation mechanisms to prevent errors from slipping through the net, among other features.
Extracting data from financial statements ‘unlocks’ data from a PDF so it can be manipulated in Excel.
There are very few financial tools on the market capable of capturing data from financial statements. Even the most industrially accomplished machine learning teams have found it challenging to build a taxonomy capable of analysing the dense, variably structured information in financial statements.
Today, specialised data extraction platforms can quickly and accurately capture information from financial statements.
When AI algorithms ‘read’ financial statements, they must understand the interconnectedness of the data. Sophisticated financial AI tools can leverage financial data to calculate and structure key ratios into a downloadable format.
Examples of these financial ratios include:
After the software has calculated and presented financial ratios, a professional can analyse them to assess the company’s financial health.
AI-powered financial software can incorporate validation mechanisms, from simple data checks to complex rule-based systems.
Internal checks will ensure that the data is extracted without errors, such as those caused by poor-quality scans of financial documents.
If the data contains inconsistencies that might suggest tampering or fraudulent activity, AI-powered algorithms can be trained to identify and flag them for manual review.
You can connect AI financial analysis software to other sources, such as external databases, to check consistency across all datasets.
Some AI financial data solutions can leverage the extracted financial data and ratios to generate graphs and charts. These AI-powered visualisation capabilities are not yet flawless, so you should always double-check the accuracy of the output.
Overall, the function of AI financial and interpretation software is to condense the time taken to analyse dense financial data. Rather than wrangling with graphs and copying and pasting data from PDFs into Excel, highly skilled and technologically literate analysts can leverage AI to achieve more detailed insights faster.
AI financial analysis and interpretation software is the culmination of decades of research. Now, AI tools finally have the precision and training to handle financial data effectively. Despite industry challenges like growing volumes of data and staff shortages, AI analysis and interpretation tools enable finance professionals to complete in-depth analysis and strategy faster and more accurately than before.
Are you looking to take the hassle out of collecting and preparing data? Try Financial Statements AI – our platform for extracting data from balance sheets and income statements.
We designed Financial Statements AI to remove the manual effort from interpreting financial statements, exorcising the tedious components of analysis, copying the data into an actionable format and calculating ratios.
Though calculating simple ratios like Gross Profit (only) takes a minute to calculate and input, that’s time wasted on a mundane, repetitive task you’d be better off using for a more valuable activity.
Financial Statements AI is user-friendly, efficient – and free when you sign up for a demo or email hello@evolution.ai.
