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Financial Statement Analysis Definition
Every company, firm or organization has a financial statement which is the official record of losses, profits, expenses and revenue of a business over a given period of time. Examples of a company’s financial statements are balance sheet, income statement, statement of cash flows, notes to accounts, and others.
Financial statement analysis refers to the review of a company’s financial statement so that better business decisions can be made. How financially healthy a company is and its financial defects are detected through financial statement analysis. This also helps is decision making.
A Little More on What is Financial Statement Analysis
The evaluation of review of a company’s financial statements refers to financial statement analysis. This is a process that entails the identification of past and current financial performance of a company as recorded in its financial statements. The goal of financial statement analysis is to evaluate the financial strength and performance of a company so that important decisions can be made.
There are diverse techniques used in financial statement analysis, the predominant techniques are;
- Horizontal analysis: This entails the analysis of a company’s financial data for a period of two years of more.
- Vertical analysis: this categorizes accounts on the company’s balance sheet and relates to the total account.
- Ratio analysis: compares different financial data.
Financial analysts evaluate, analyze or review the financial statements of an organization with the purpose of identifying financial patterns and trends over multiple periods. Through financial statement analysis, the financial health and stability of a company can be detected. For instance, the balance sheet of a firm gives a sneak peek into the equity, assets and liabilities of a company for a given period of time. More importantly, financial statement analysis is an important metric in evaluating the cash flow, liquidity and profitability of a company. The overall financial health of the company is identified.
Financial Statement Analysis
Through financial statement analysis, companies are able to keep records of their financial performance for a given period and also make decisions on how to improve the performance over a space of time. A company can use the horizon, vertical or ratio analyses techniques for financial statement analysis.
Also, a company can compare its performance over multiple periods through the financial statement analysis.