3.2 : Analysis of Financial Statements

The analysis of financial statements involves examining and interpreting a company's financial data to assess its performance and make informed business decisions. The process involves using various metrics and methods to assess profitability, liquidity, solvency, and efficiency, helping stakeholders make informed decisions about a company's financial status.

It is crucial for internal stakeholders, such as the finance team and business leaders, and external stakeholders, such as investors.

Comparative analysis is a powerful tool that helps stakeholders unearth key insights into a company's performance. Trend analysis, on the other hand, equips finance professionals and investors with the knowledge of changing company trends, thereby facilitating better decision-making.

Financial metrics, such as profitability, solvency, and liquidity ratios, are pivotal in helping finance teams and business leaders assess resource management and progress toward financial goals.

Investors also use ratio analysis to gauge a company's financial health and growth potential for informed investment decisions. They provide a clear picture of a company's financial health and aid in making strategic decisions.

There are two key methods of financial statement analysis: vertical and horizontal.

Vertical Analysis

This method evaluates each line item on the income statement as a percentage of total revenue, revealing the relative weight of each component.

Horizontal Analysis

This approach compares year-over-year changes in line items, identifying trends in growth or decline across periods.