Analyzing Financial Statements

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company's financial statementsLinks to an

external site. for decision-making purposes. External stakeholders use it to understand the overall health
of an organization as well as to evaluate financial performance and business value. Internal constituents
use it as a monitoring tool for managing the finances.

Analyzing Financial Statements

The financial statements of a company record important financial data on every aspect of a business’s
activities. As such they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in
the U.S. These principles require a company to create and maintain three main financial statements: the
balance sheet, the income statement, and the cash flow statement. Public companies have stricter
standards for financial statement reporting. Public companies must follow GAAP standards which
requires accrual accounting. Private companies have greater flexibility in their financial statement
preparation and also have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most
important techniques include horizontal analysisLinks to an external site., vertical analysisLinks to an
external site., and ratio analysisLinks to an external site.. Horizontal analysis compares data horizontally,
by analyzing values of line items across two or more years. Vertical analysis looks at the vertical affects
line items have on other parts of the business and also the business’s proportions. Ratio analysis uses
important ratio metrics to calculate statistical relationships.

1. Areas in Financial Analysis

b.1. Liquidity

b.2. Profitability

b.3. Asset Management

b.4. Solvency

b.5. Marketability/ value analysis

1. Methods in Financial Analysis

c.1. Horizontal

c.2. Vertical

c.3. Ratio Analysis

c.4. Du Pont Expansions

How to read Financial StatementsJames Webb: How to Read a Financial Statement [Crowell School of
Business]Links to an external site.

Financial Statement AnalysisTopic 6 - Financial statement analysisLinks to an external site.

Du Pont Analysis

DuPont analysis explainedLinks to an external site.