Why Financial Statement Analysis Is a Fossil and Strategic Analysis Reads the Future

According to reporting by Shen Suming of Huxiu, much of financial statement analysis is merely ex post interpretation, and it is strategic analysis that provides the clue to a company’s sustainability and future. Published on September 8, 2026, the essay titled “All Financial Statement Analysis Is Nonsense; Only Strategic Analysis Matters” acknowledges the importance of finance as an accounting record, while pointing out structural problems inherent in financial statement analysis as the act of interpreting that record. Using the solar power and electric power industries as examples, it argues that attention should be paid to tamper-proof facts behind the numbers, such as resource endowments, technology routes, and positions in the ecosystem.

Finance is the language of accounting, the books that form the foundation of management, and the infrastructure of corporate operations. Without finance, a company cannot run for a single day. But “finance” and “financial statement analysis” are different things.

He writes, clearly distinguishing finance itself from the act of analysis. His position is that the problem lies less in the accuracy of the numbers than in how numbers are selected and turned into narratives.

Financial Statements Reflect Only Past Results

A financial statement is the final aggregated value of all of a company’s business activities over the past year or quarter, after accounting treatment. Revenue, costs, profits, cash flow, inventories, and accounts receivable are all shells left behind after strategy has been executed; they show results. In Shen Suming’s reporting for Huxiu, working backward from the shape of these shells to infer causes is positioned as the central task of financial statement analysis.

Explanations such as weak demand when revenue falls, intensified competition when gross margins decline, and deteriorating collections when cash flow tightens appear at first glance to capture cause and effect. In reality, however, they merely fit multiple causes ex post to a single point called the result. Even the same surge in profits can be used to construct any number of different stories — product strength, success or failure in building sales channels, industry-wide tailwinds, or skillful accounting treatment. Which story is chosen depends on the analyst’s standpoint and preconceptions.

This structure carries the risk of falling into justification with a foregone conclusion while assuming the guise of analytical expertise. Even when dressed up with tables, indicators, and year-on-year or quarter-on-quarter comparisons, it always looks backward on the time axis. It is akin to commenting after a car crash that “the driver should have slowed down at that curve,” and does not readily lead to judgments about the future.

The Structural Flaw of Working Backward from

Results to Causes

The foundational flaw in financial statement analysis lies in its very methodology of working backward from results to causes. Because it is not deduction that derives results from causes, but inductive interpretation that guesses causes from results, countless causes compete to explain the same result.

For example, a company with surging profits can be interpreted as benefiting from competitive products, attributed to superior sales channels, or seen as merely enjoying favorable market conditions. Differences in accounting estimates or period allocations may also have contributed. The analyst selects one of these and assigns a plausible causality. The criterion for selection is not objective verification, but the hypotheses and expectations the analyst holds in advance.

This flaw undermines the reproducibility of analysis. Even when different analysts read the same financial statements, their conclusions can be diametrically opposed if their underlying narratives differ. The numbers themselves are objective records that have been audited, but subjectivity intervenes at the stage of choosing which numbers to extract, which periods to compare, and which indicators to emphasize. As a result, elaborate far-fetched interpretations circulate under a professional guise, which is the focus of his criticism.

Numbers Are Objective,

but Selection and Interpretation Are Subjective

The gap between the objectivity of numbers and the subjectivity of interpretation appears most clearly in how specific accounts are reinterpreted. Take an increase in accounts receivable: an analyst with pessimistic preconceptions reads it as a loss of control over sales channels, an increase in inventories as shrinking demand, and a rise in the expense ratio as managerial confusion. The numbers presented are factual, but other facts — such as an increase in advance receipts, expanded R&D investment, or growing market share — may be deliberately omitted.

Conversely, if an analyst with optimistic preconceptions handles the same statements, an increase in receivables is interpreted as proactive easing of credit to seize market share, an increase in inventories as strategic stockpiling ahead of peak season, and a rise in the expense ratio as investment for the future. The numbers are identical, but the story is reversed.

Shen Suming’s reporting for Huxiu describes this phenomenon as a state in which “facts are bound by preconceptions.” Before putting pen to paper, the analyst has already roughly decided on an answer in mind, searches the financial statements for numbers that support that answer, and decorates them with technical language as if they were conclusions derived through calculation. This act is highly sophisticated self-justification, and precisely because it wears the cloak of expertise, it is harder to detect than a blatant error, he notes.

Financial Statements Are Fossils,

Unable to Keep Up with Change

Another inherent constraint of financial statement analysis is time lag. The world depicted in an annual report is already three months, six months, or even a year old by the time it is published. Meanwhile, changes in the business environment proceed at a pace far exceeding the accounting cycle.

He cites solar panels as an example. It took only a year for prices to fall from 1.9 yuan to 0.8 yuan, and in some cases only two years for a technology route to be pushed from the mainstream to the margins. A moat indicating a company’s competitive advantage can be filled in by a single technological innovation. By the time these changes are reflected as numbers in financial statements, winners and losers have already been decided.

The metaphor likening financial statements to fossils succinctly illustrates this lag. A fossil is authentic as evidence of a creature that once existed, but it does not tell us why the species went extinct or what the next dominant species will be. Valuable judgments must be made before financial statements deteriorate. The essay’s central argument is that it is strategic analysis that bears responsibility for such judgments.

Strategic Analysis Asks About Mechanisms

Strategic analysis does not focus primarily on books, accounting estimates, or adjustments to standards. It looks at logic, structure, and facts. While financial statements tell us “how much” profit has fallen, strategic analysis asks “why” that position has changed, whether competitiveness is being maintained, and whether the business logic still holds.

Even a company with declining profits may be sacrificing short-term earnings to gain a long-term position. Conversely, even a company with surging profits may be eroding its own foundation. Numbers show what happened; strategic analysis clarifies why it happened.

Focusing on mechanisms provides a basis for judging sustainability. The fact that a company has low costs is merely a result. The question is why they are low. Is it due to economies of scale, resource endowments, managerial capability, locational conditions, or dependence on a particular individual’s ability? Different factors determine how long the advantage will last. Scale advantages can be swallowed by even greater scale, resource endowments can shift with policy changes, and individual capabilities can be lost to poaching. Financial statements show only the fact that costs are low, and say nothing about the reasons or sustainability.

Furthermore, the facts dealt with in strategic analysis have the characteristic of being difficult to falsify. Profits can be adjusted through accounting treatment, but the physical fact of whether one has a river at hand cannot be adjusted. Gross margins can be selectively quoted, but the fact that a technology route is being marginalized in the industry cannot be concealed. Inventories can be interpreted favorably, but it is difficult to interpret the shrinking of one’s position in the ecosystem as an improvement. Structural facts — who holds resources, where trends are heading, who is taking whose revenue sources — exist as they are, without need for manipulation of books or selection of periods. Letting the facts speak for themselves keeps strategic analysis away from preconceptions, he argues.

Cases Illustrate the Divide Between

Prediction and Ex Post Confirmation

This difference becomes clear in cases from the power and solar industries. The configurations — China Energy Group’s “coal-power-railway-port-shipping integration,” China Huaneng’s lineup centered on hydropower and nuclear power as trump cards, China Huadian’s combination of gas-fired and hydropower, State Power Investment Corporation’s solar scale and debt structure, China Three Gorges Corporation’s basin monopoly, and SDIC Power’s monopoly over the Yalong River — were none of them derived from reading financial statements. They were inferred from industry structure, resource endowments, strategic choices, and management logic. Financial statements are merely belated confirmations of these strategic judgments. By the time financial statements reflect problems, strategic opportunities have already closed, he says.

The case of LONGi Green Energy is similar. Its financial statements have clearly deteriorated over the past two years, but he points out that a truly valuable judgment should have been made two years ago — namely, discerning the structural fact that the company was falling behind in TOPCon and placing all its bets on a single, as-yet-unproven technology route. This fact cannot be read from financial statements, but can be captured through strategic analysis, he says.

Of course, he does not deny the value of financial capability itself. Finance is indispensable infrastructure for keeping books clear, enabling managers to grasp omissions, and giving capital markets a common language for dialogue. What he criticizes is the overestimation of financial statement analysis as if it were judgment itself, and its use as a tool to wrap up predetermined conclusions. Financial statement analysis has value as commentary, but only strategic analysis has the power to cross the divide — if the path is right, results will eventually improve, and if the path is wrong, temporary strength will not last — which is his conclusion.

Editorial Opinion

In the short term, investment and competitive analysis methods that chase only the figures in earnings releases and securities reports may be relatively discounted. Especially in equipment-based industries such as solar and power, shifts in technology routes and enclosure of resources decide winners and losers ahead of accounting figures, so analysis that rejoices or laments quarterly ups and downs will fail to keep up with market changes. On the corporate side, pressure is likely to grow in IR to disclose the rationale for technology choices and the logic of resource allocation, rather than superficial explanations of higher revenue and profits. In the long term, the value of talent and organizations that integrate financial statement analysis and strategic analysis will increase. Accounting figures are indispensable as a device for verifying results, but without a perspective that questions sustainability, short-term optimization can lead to erosion of long-term position. The ability to monitor at fixed points the facts that shape competitive structure, such as resource endowments and positions in the ecosystem, and to anticipate generational shifts in technology, will determine corporate survival over a one- to three-year horizon. In education and hiring as well, analytical ability combining accounting knowledge with the ability to read industry structure is likely to be required. The question from the editors is how free readers’ own analyses are from preconceptions.

References

• ” 财报分析都是瞎掰，战略分析才有意义 ”, by 沈素明 — 虎嗅网, 2026-09-08T22:44:18.000Z (ARR)
• Source URL: https://www.huxiu.com/article/4889656.html?f=rss