Types of Financial Analysis
Financial analysis involves using financial data to assess a
company’s performance and make recommendations
about how it can improve going forward.
1. Horizontal analysis – taking several years of financial
data and comparing them to each other to determine
a growth rate; side-by-side comparison of the financial
results of an organization for a number of consecutive
reporting periods
2. Vertical analysis – involves looking at various
components of the income statement and dividing
them by revenue to express them as a percentage;
proportional analysis of the various expenses on the
income statement, measured as a percentage of net
sales
3. Short term analysis – detailed review of working
capital, involving the calculation of turnover rates for
accounts receivable, inventory, and accounts payable
4. Multi-company comparison – calculation and
comparison of the key financial ratios of two
organizations, usually within the same industry
5. Industry comparison - similar to the multi-company
comparison, except that the comparison is between
the results of a specific business and the average
results of an entire industry
6. Leverage analysis – the use of leverage ratios to
evaluate company performance
7. Growth Rates – the use of Year-over-year (YoY),
regression analysis, bottom-up analysis (starting with
individual drivers of revenue in the business), top-
down analysis (starting with market size and market
share), and other forecasting methods
8. Profitability Analysis – a type of income statement
analysis where an analyst assesses how attractive the
economics of a business are; use of profitability ratios
like gross margin, EBITDA margin, EBIT margin, and net
profit margin
9. Liquidity Analysis – focuses on the balance sheet,
particularly, a company’s ability to meet short-term
obligations (those due in less than a year); use of
current ratio, acid test, and net working capital
10.Efficiency Analysis – to look at how well a company
manages its assets and uses them to generate revenue
and cash flow using efficiency ratios such as asset
turnover ratio, fixed asset turnover ratio, and
inventory turnover ratio
11.Cash Flow – a big emphasis is placed on a company’s
ability to generate cash flow by looking at each of the
three main sections: operating activities, investing
activities, and financing activities
12.Rates of Return – investors, lenders, and finance
professionals focus on what type of risk-adjusted rate
of return they can earn on their money, with that,
assessing rates of return on investment (ROI) is critical
in the industry
13.Valuation – approaches to valuation include cost
approach which is the cost to build/replace, relative
value (market approach) which uses comparable
company analysis and precedent transactions, and
intrinsic value which uses the discounted cash flow
analysis
14.Scenario & Sensitivity Analysis – it is building scenarios
and performing sensitivity analysis can help determine
what the worst-case or best-case future for a company
could look like
15.Variance Analysis – process of comparing actual
results to a budget or forecast which is a part of the
internal planning and budgeting process at an
operating company, particularly for professionals
working in the accounting and finance departments