What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s 澳洲幸运5官方开奖结果体彩网:financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organiཧzation and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

How to Analyze Financial Statements

The financial statements of a company record important fina💮ncial 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 澳洲幸运5官方开奖结果体彩网𒁏:෴generally accepted accounting principles (GAAP) in the United States. 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, which requires accrual accounting. Private companies have greater flexibility in their financial statement preparation and 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 are 澳洲幸运5官方开奖结果体彩网:horizontal analysis, 澳洲幸运5官方开奖结果体彩网:vertical analysis, and 澳洲幸运5官方开奖结果体彩网:ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that ♒line items have on other parts of the business 🌱and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Types of Financial Statements

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconneওcted and create different views of a company’s activities and performance.

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets, 澳洲幸运5官方开奖结果体彩网:liabilities, and 澳洲幸运5官方开奖结果体彩网:shareholder equity. Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s 澳洲幸运5官方开奖结果体彩网:book value and serves as♌ an important performance metric that increa🍨ses or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify 澳洲幸运5官方开奖结果体彩网:gross profit. It then moves to 澳洲幸运5官方开奖结果体彩网:operating profit, which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the 澳洲幸运5官方开奖结果体彩网:net income is reached.

Basic 澳洲幸运5官方开奖结果体彩网:analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin,⭕ and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s 澳洲幸运5官方开奖结果体彩网:cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The botꦚtom line shows how much cash a company h🎃as available.

Free Cash Flow and Other Valuation Statements

Companies and analysts also use free cash flow statements and other valuation statements to 澳洲幸运5官方开奖结果体彩网:analyze the value of a company. Free cash flow statements arrive at a 澳洲幸运5官方开奖结果体彩网:net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may keep a valuation statement a⛎s they progress toward🌼 potentially going public.

Financial Performance

Financial statements are maintained by companies daily and used internally for business management. In general, both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall 澳洲幸运5官方开奖结果体彩网:financial performance.

When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results. Finally, 澳洲幸运5官方开奖结果体彩𒐪网:ratio analysis can be used to isolate some perf🗹ormance metrics in each stat🌼ement and bring together data points across statements collectively.

B꧒elow is a breakdown♕ of some of the most common ratio metrics:

• Balance sheet: This includes asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
• Income statement: This includes gross profit margin, operating profit margin, net profit margin, tax ratio efficiency, and interest coverage.
• Cash flow: This includes cash and earnings before interest, taxes, depreciation, and amor♌tization (EBITDA). These metrics may be shown on a per-share basis.
• Comprehensive: This includes 澳洲幸运5官方开奖结果体彩网:return on assets (ROA) and 澳洲幸运5官方开奖结果体彩网:return on equity (ROE), along with 澳洲幸运5官方开奖结果体彩网:DuPont analysis.