Financial Statement Analysis: Definition, Types, How to do, Example

Financial statement analyses are typically performed in spreadsheet software — or specialized accounting software — and summarized in a variety of formats. No matter the specific use case of the analysis, ensuring that its findings are accurately reported and effectively communicated to the target audience is as important (if not more important) as the core analysis itself. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.

1. Vertical analysis converts each line item on a financial statement to a percentage of a key financial factor for the purpose of comparison across reporting periods.
2. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
3. Assessing working capital, inventory, and supply chain metrics identifies operational risks.
4. A P&L statement helps analysts evaluate the profit drivers and factors impacting bottom-line earnings or losses for the reporting period.
5. Evaluating margins, liquidity, cash generation, and capital returns over time and versus competitors gauges operating success and financial strength.

Sources of financial data include company reports, financial statements, stock exchanges, regulatory filings, economic reports and financial news platforms. These sources provide critical information for analysis, forecasting and decision-making. This will provide insights into how the company intends to compete and position itself financially. For example, is the strategy to pursue aggressive growth or operate conservatively?

This ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis. Horizontal Analysis refers to the analysis and review of financial statements across a period of time. While each statement has a distinct purpose, collectively, it offers a robust picture of the organization’s financial activities and health. Analyzing relationships and trends across financial statements allows stakeholders to make informed judgments regarding the business. The statement of shareholders’ equity summarizes changes in equity accounts like common stock, paid-in capital, and retained earnings.

Global Standards for Exchanging Financial Data

Vertical analysis converts all financial data to percentages, standardizing the scale to make period-to-period comparisons more meaningful. Analysts quickly spot changes in financial statement relationships and sections that merit further research. Financial analytics involves using massive amounts of financial and other relevant data to identify patterns to make predictions, such as what a customer might buy or how long an employee’s tenure might be. As they say in finance, cash is king, and, thus, a big emphasis is placed on a company’s ability to generate cash flow.

Horizontal Analysis (or Dynamic Analysis):

Some projects or products will prove to be less profitable, and so can be eliminated in favor of more profitable alternatives. The result should be a more fine-tuned organization that generates greater profits. A second advantage is that investors can gain a better understanding of which companies are more likely to generate a better return on investment. Third, financial analysis can be used to spot trends in revenues and expenses within a business that can be exploited with forward-looking investments. These investments may be able to generate greater returns than is currently possible with a firm’s existing investments. Understanding how the cost profile of the firm moves and changes across the entirety of these functions is vital to make sure the company can sustain profitability in the long run.

1. Once the data is gathered, we move to the step of the analysis itself, where the objective is the manipulation of the data to answer the key business and financial questions that sparked the analysis in the first place.
2. Fundamental financial analysis starts with the information found in a company’s financial reports.
3. Ratio analysis involves creating financial ratios using accounts and figures from the key financial statements.
4. Calculating a single instance of data is usually worthless; comparing that data against prior periods, other general ledger accounts, or competitor financial information yields useful information.
5. For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas.
6. It encompasses a range of techniques to understand financial conditions, profitability, and the sustainability of business operations.
7. From the income statement, we can analyze RIL’s revenue, costs, expenses, and net profits over several years to understand the profitability trends.

What are examples of financial data?

The cash flow statement helps assess the company’s liquidity, operating efficiency, and ability to meet its financial obligations. The application of analytics is crucial in financial services and other data-intensive fields. Financial services businesses, including investment banks, generate and store more data than just about any other business in any other sector, mainly because finance is a transaction-heavy industry. The financial analysis aims to analyze whether an entity is stable, liquid, solvent, or profitable enough to warrant a monetary investment.

Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes. A global framework for exchanging business information, allowing the expression of semantic meaning commonly required in business reporting. XBRL is widely used for submitting financial information to regulators and for sharing corporate financial data electronically.

While financial forecasting involves inherent uncertainties, it provides valuable insights for decision-making and strategic planning. Chief financial officers traditionally relied on historical data and trends to forecast future performance. However, they are changing their focus as they increasingly tap into technologies, such as advanced data analytics, machine learning and automation. As finance departments have begun adopting financial analytics to home in on what’s happening in the business and what that’s likely to mean going forward, their roles have changed from information provider to problem solver.

In investment finance, an analyst external to the company conducts an analysis for investment purposes. For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas. This allows the business to forecast budgets and make decisions, such as necessary minimum inventory levels, based on past trends. Intra-firm Comparison refers to a comparison of an enterprise’s financial variables over two or more accounting periods. External Analysis refers to analysis performed using published statements, reports, and information. Internal Analysis is the analysis performed on the basis of the company’s accounting records and other relevant information.

Assessing working capital, inventory, and supply chain metrics identifies meaning of financial analysis operational risks. Comparing company performance versus competitors highlights strategic advantages and threats. Financial analysis provides critical risk insights while revealing potential opportunities that warrant increased investment. Next, horizontal, vertical, and ratio analyses are conducted to identify changes and trends. Horizontal analysis compares financial data across a row of financial statements over a series of reporting periods.

Efficiency Analysis

Analyze how business risks, opportunities, and strategies relate back to the financial statements. This establishes the linkage between management intentions and actual financial outcomes. Gross profit margin, operating margin, net profit margin, return on assets, and return on equity provide different perspectives on the company’s profit drivers and ability to generate returns from inputs.

Since the task of building a model to value a company is an attempt to predict the future, it is inherently very uncertain. A messaging standard developed specifically for the real-time electronic exchange of securities transactions, widely used for trading and pre-trade/post-trade communication. Developed by the International Accounting Standards Board (IASB), these are international accounting standards that ensure consistency and transparency of financial reporting across international borders. A universal financial industry message scheme that provides a platform for the development of financial messages using a standardized methodology.