Financial Analysis

Financial analysis is the process of evaluating budgets, businesses, projects and other finance-related entities to determine their performance and suitability. Generally, financial analysis is being conducted to analyze whether an entity is stable, solvent, liquid or profitable enough to warrant a monetary investment.

 

Within a company financial analysis is made by company executives, competitors, creditors, managers and potential investors. Financial analysis is done according to financial statements and the four basic financial statements are: income statement, balance sheet, statement of cash flows, statement of retained earnings. Each of them is made once a year.

 

Analysis of financial statements can be done in three ways: horizontal, vertical and ratio analysis. Horizontal analysis compares compares financial statements of two or more years. The analyst reads same information of different years across the page. Differences from year to year are found this way. The base year (first year of the company) percentages are shown as 100 percent, and the increase or decline in percentages can be easily described. A variation of the horizontal analysis is called the trend analysis.  Vertical analysis includes the calculation of percentages of a single financial statement. The figures on this financial statement are taken from the company’s income statement and balance sheet. Vertical financial statement analysis is also known as component percentages. There are several types of ratio analysis that can be used in interpreting financial statements. Ratios may be calculated for each year’s financial data and the analyst examines the relationship between the findings, finding the business trends over a number of years.

Financial analysis is the process of evaluating budgets, businesses, projects and other finance-related entities to determine their performance and suitability. Generally, financial analysis is being conducted to analyze whether an entity is stable, solvent, liquid or profitable enough to warrant a monetary investment.

 

Within a company financial analysis is made by company executives, competitors, creditors, managers and potential investors. Financial analysis is done according to financial statements and the four basic financial statements are: income statement, balance sheet, statement of cash flows, statement of retained earnings. Each of them is made once a year.

 

Analysis of financial statements can be done in three ways: horizontal, vertical and ratio analysis. Horizontal analysis compares compares financial statements of two or more years. The analyst reads same information of different years across the page. Differences from year to year are found this way. The base year (first year of the company) percentages are shown as 100 percent, and the increase or decline in percentages can be easily described. A variation of the horizontal analysis is called the trend analysis.  Vertical analysis includes the calculation of percentages of a single financial statement. The figures on this financial statement are taken from the company’s income statement and balance sheet. Vertical financial statement analysis is also known as component percentages. There are several types of ratio analysis that can be used in interpreting financial statements. Ratios may be calculated for each year’s financial data and the analyst examines the relationship between the findings, finding the business trends over a number of years.