What Is a Financial Statement Analysis?
A financial statement analysis is a process of reviewing and evaluating the financial statements of a business to make better and crucial decisions. The financial statement analysis involves analysing the balance sheet, income statement, profit and loss statement, cash flow statement, and statement of changes of equity.
Which Is the Most Important Financial Statement?
The most important component of a financial statement is the income statement, balance sheet, and the statement of cash flows. These statements are created to be defined as a whole, to properly represent the financial analysis condition and results of a business.
How Do I Do a Financial Analysis?
Here are some ways you can do a financial analysis.
- Trend analysis. This analysis is also called a time-series analysis where it helps the business’s financial manager to identify how the business analysis will perform over time.
- Common size financial statement analysis. This analysis will analyze the balance sheet and income statement of the business using percentage.
- Percentage change financial statement analysis. This analysis calculates the growth rates for all income statement and balance sheet accounts pertinent to a base year.
- Benchmarking. This compares one business to another business to determine how a business is doing financially compared other business.
How to Analyze a Company’s Financial Statement
- Gather all the financial statement of a company within the last three to five years.
- Analyze these statements and find out for large movements.
- Review the financial notes.
- Analyze the balance sheet to see if there are changes in the asset, liabilities, or equity of the company.
- Analyze the income statement if there are trends over time.
- Analyze the business’s shareholder’s equity statement.
- Analyze the company’s cash flow statement.
- Calculate the financial ratios.
- Collect the data of the competitor.
- Review the market’s stock price and the price to earnings (P/E) ratio.
- Review the dividend payout.
Why Is the Financial Statement Analysis Important?
- To provide the shareholders of the company crucial decisions whether they have to continue their shares of the company or sell them out to other shareholders.
- The financial statement analysis is a big part of taking responsibilities in creating decision and formulating plans and policies for the future.
- The financial statement analysis will help the creditors of the company to decide whether they have to extend their loans and demand for higher interest rates.
- The financial statement analysis will also help the investors to decide whether to invest their capital in the company’s share.
Limitations of Financial Ratio Analysis
- The use of average ratios instead of using the ratios of high-performance firms in your company.
- Due to the inflation, the balance sheet of a company may be distorted.
- Financial ratio analysis just gives you figures and will not make sense without comparison against trend data.
- The different division may need comparison to different company averages to make the financial ratio analysis meaningful
- Financial ratio analysis is made up of the data found in the business firms’ financial statements. If the statement of the company is not that good, the ratio analysis may also be affected.