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Financial Statement Analysis: How It’s Done, by Statement Type

File Photo: Financial Statement Analysis: How It’s Done, by Statement Type
File Photo: Financial Statement Analysis: How It’s Done, by Statement Type File Photo: Financial Statement Analysis: How It’s Done, by Statement Type

Definition of Financial Statement Analysis

Financial statement analysis involves assessing a company’s financial statements for decision-making. External stakeholders use it to determine an organization’s health, financial performance, and business value. Internal constituents use it to check money.

Financial Statement Analysis

The financial accounts of a corporation include every facet of its operations. They can be evaluated based on their performance in the past, in the present, and the future.

Financial statements in the US typically follow GAAP. A corporation must develop and maintain its balance sheet, income statement, and cash flow statement using these principles. Public corporations report financial statements more strictly. Public enterprises must use accrual accounting under GAAP. Private enterprises can employ accrual or cash accounting for financial statement preparation.

Several methods are utilized for financial statement analysis. Three key strategies are horizontal, vertical, and ratio analysis. Horizontal analysis compares line item values across two or more years. Vertical analysis examines how line items affect other business segments and proportions. Ratio analysis analyzes statistical linkages using key ratio measurements.

Financial Statement Types

Balance sheets, income statements, and cash flow statements help companies manage operations and give transparency to stakeholders. The three assertions are interconnected and demonstrate various aspects of a firm’s operations and outcomes.

The Balance Sheet

The balance sheet shows a company’s book value. Company assets, liabilities, and shareholder equity comprise its three elements. Short-term assets like cash and accounts receivable can indicate a company’s operational efficiency; liabilities include expense arrangements and debt capital paid off; and shareholder equity includes equity capital investments and retained earnings from periodic net income. Assets and liabilities must match shareholder equity on the balance sheet. The book value of a corporation is a crucial performance statistic that fluctuates with its financial activity.

The Income Statement

The income statement shows a company’s net profit or loss by comparing revenue to costs. The three-part income statement analyzes business efficiency in three areas. Start with revenue and direct costs to calculate gross profit. Excluding indirect costs like marketing, general, and depreciation helps to calculate operating profit. The net income is determined after subtracting interest and taxes.

Typical income statement analysis involves calculating gross, operating, and net profit margins, which divide profit by revenue. Profit margin shows where firm costs are low or high, depending on activities.

Cashflow Statement

The cash flow statement summarizes the company’s cash flows from operating, investing, and financing operations. On the cash flow statement, net income is the top line item for operational operations. Investing operations entail firm-wide cash flows. The financial activities segment contains loan and equity cash flow. The bottom line reveals a company’s cash flow.

FCF and Other Valuation Statements

Analysts and companies utilize free cash flow statements and other valuation metrics to assess business worth. A company’s net present value is calculated by discounting its expected free cash flow over time. Private corporations may preserve value statements as they consider going public.

Financial Results

Businesses utilize daily financial statements for management. Internal and external stakeholders typically use the same corporate finance methods to manage business operations and assess financial performance.

Multiple years of data are used for horizontal analysis in comprehensive financial statement analysis. Vertical analysis is performed on each financial statement to see how categories affect results. Finally, ratio analysis may identify performance measures in each sentence and combine data points across statements.

Some typical ratio measurements are:

  • Balance sheet: asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
  • Gross, operational, net, tax ratio efficiency, and interest coverage are on the income statement.
  • Cash flow refers to cash and EBITDA (earnings before interest, taxes, depreciation, and amortization). Per-share analytics are possible.
  • Comprehensive analysis covers ROA, ROE, and DuPont analysis.

What are the benefits of financial statement analysis?

Finance statement analysis assesses a company’s performance or value using its balance sheet, income statement, or cash flow statement. Horizontal, vertical, and ratio analyses can help investors understand a company’s finances.

What sorts of financial statement analysis exist?

Analysts often utilize three methods to analyze a company’s financial statements.

First, horizontal analysis compares historical data. Horizontal analysis commonly finds growing tendencies throughout time.

Second, vertical analysis compares financial statement components. For instance, an expenditure may represent a percentage of firm revenue.

In conclusion, fundamental equity analysis relies on ratio analysis to compare line-item data. Ratio analysis includes P/E, EPS, and dividend yield.

An example of financial statement analysis

An analyst may examine specific income statement ratios to assess a company’s profitability and shareholder value. Gross profit margin compares revenues to the costs of items sold. This may be good if the firm has a higher gross profit margin than its competitors. The analyst may see that the gross profit margin has increased across nine fiscal quarters by applying a horizontal analysis to the company’s operational patterns.


  • Financial statement analysis helps internal and external stakeholders assess business performance and value.
  • All organizations must prepare a balance sheet, income statement, and cash flow statement for financial statement analysis.
  • Analysts analyze financial statements using horizontal, vertical, and ratio analyses.

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