Financial statement analysis is the process of examining a company’s financial statements in order to make decisions. This analysis  is used by external stakeholders to assess an organization’s general health as well as its financial performance and market value. It serves as a monitoring tool for handling finances for internal stakeholders.

Internal and external stakeholders both utilize financial statement analysis to assess the worth and performance of an organization.

All businesses are required by financial accounting to produce balance sheets, income statements, and cash flow statements, which serve as the foundation for financial statement analysis.

Financial statement analysis assesses a company’s balance sheet, income statement, or statement of cash flows to assess its performance. 

Investors can create a more complex picture of a company’s financial profile by utilizing a variety of techniques such as- 

• Horizontal analysis
• Vertical analysis
• Ratio analysis
• Trend analysis

Horizontal analysis

In horizontal analysis a company’s progress through time, performance from two or more periods is compared. To get a broad sense of trends, each item in a ledger is compared to the prior time frame.

There might be some components that are costing the company more if, for instance, the cost of final goods increases by 40% over the course of a year without being represented in the income generated.

Vertical analysis

Vertical analysis refers to establishing a correlation between several ledger line items with the aid of vertical analysis. It enables analysts to comprehend overall performance in terms of receipts and outlays. The outcomes are examined as a ratio.

Ratio evaluation

A general increasing or downward trend can be seen by comparing one financial component to another using ratio methods of financial analysis. Once the ratio has been determined, it can be compared to the prior period to determine whether the company’s performance is in line with predetermined goals. It enables management to identify any departure from expectations and implement remedial actions.

Trend evaluation

Trend analysis can be described as a mathematical method for predicting future outcomes based on historical data. One or more organizations for the same term, or another organization for a different period, may be the subject of a trend analysis. A trend is a collection of data from financial accounts that has been examined to draw useful conclusions.Analyzing trends over three or more time periods is beneficial. It considers the earliest year as the base period and accounts for gradual change trends. A financial statement’s shift will either show a rising or falling trend.