The financial statement analysis tools help to understand the financial health of a business organization. It helps business organizations understand their past performance and forecast their future performance as well. FSA helps to know how it deployed investments, how to utilize available resources most efficiently, how competitors are using their resources, and what risks are involved in meeting future cash outflow needs of the business enterprise. Usually, a business enterprise uses financial statement analysis tools to present its investment proposal to secure loans, grant, or raise equity finance.
Various methods in Financial Statement Analysis
- When you establish the relationship between combining various financial statements or just two of the objects of financial statements, it is a type of analysis on a quantitive basis. This, in simple terms in finance, is known as the analysis of ratios. In general, three statements in financial analysis: income analysis statement, cash flow analysis statement, and balance sheet analysis statement. Financial performance, such as liquidity, profitability, solvency, and efficiency, helps management make decisions.
- In financial statement analysis, common-size statements play a vital role. The financial statements point out all data in terms of percentages of the base figure. This is known as the common-size statement. You are using financial statement analysis tools when comparing financial statements between specific periods within the same company or between two or multiple companies.
- When the FIs are dealing with multiple financial statements for a while, that is known as a comparative statement. Financial statement analysis tools and techniques need to be applied for users to understand comparative statements. Relative information is presented in financial statements through a table. A comparison of two or more parameters for two or more periods is possible with its help. The concept of a comparative statement is essential in accounting.
- Trend analysis is absolutely vital for evaluating the company’s future performance. Financial statement analysis tools analyze the trend in financial statement figures to determine whether there are positive or negative trends, comparing actual figures with budgeted ones for the same period.
- A cash flow analysis/statement shows how the changes in the balance sheet, income statement, and statement of cash flow affect Cash and its equivalents in a business.
- To use financial statement analysis tools, one needs a statement of the funds’ flow. This statement helps the analyzer to depict the source. The company’s economic health changes from beginning to end are shown in this statement.
Some common good financial statement analysis qualities
- Financial statement analysis needs to be done objectively, reducing any behavioral bias as much as possible.
- Financial statements should be analyzed precisely and concisely, providing relevant information without too many extra details that would get in the way of understanding it.
- Information from financial statement analyses needs to present so that they are understandable.
- The relevance of analysis is determined by how appropriate the data is for deciding whether or not there will be a change or improvement.
- For the results of an assessment of financial statements to have credibility and reliability, both material error and biases need to be eliminated.
Check How Financial Statements are Measured?
Horizontal and vertical analysis for financial statement analysis
Comparative statements – Comparative financial statements provide information about how an entity’s finances have changed over time. Comparative statements are usually more significant than single-year ones. Comparative statements are much more critical than single-year statements. Still, the horizontal analysis is even better at shining light on trends and relationships between items appearing in the same row of a comparative report.
- Horizontal analyses – The items on a row in a comparative financial statement, such as sales, can be compared over time to investigate trends and establish relationships between them. In horizontal analysis, you take each item (such as sales) from one fiscal period then compare it with an identical item in another different period to see how it has changed: either by dollars, percentage change rate, or ratio format; this can be done on balance sheets, income statements, schedules of current assets and retained earnings.
- As part of the vertical analysis, items on financial statements are converted into percentages to facilitate comparisons. An item of a balance sheet can be expressed as its relationship to its total assets, liabilities, and shareholders’ equity accounts to shareholders’ equity and liabilities.
The challenges in financial statement analysis
- Comparing two companies with differing accounting practices (such as Inventory LIFO vs. FIFPO or depreciation method) will always be difficult due to the natural difference. This could lead one company’s numbers to appear more optimistic than they would if we were comparing apples-to-apples (i.e., same accountant used by both entities). These calculations’ integrity/accuracy level relies heavily on input data since estimates themselves rely heavily on it being “correct.
- Comparing companies with different fiscal year-ends can be difficult because each company has its way of calculating the value of its assets and liabilities along with income statements and balance sheets.
- Some companies have different fiscal year-end days, making comparisons difficult with other companies.
Choose good financial statement analysis tools.
The Perfios financial statement analysis tools allow you to interpret line items in spreadsheets from financial statements through its proprietary algorithms such as Machine Learning or Optical Character Recognition capabilities. Then it construes them broadly into categories relevant for creditworthiness assessment by lenders’ policies standards. A comprehensive analysis is conducted on each aspect, including assets, liabilities, cash flow (or debt), and working capital aspects defining prospects’ creditworthiness following lenders’ desired outcomes through integrating human ingenuity and technology innovation. The tool is a one-stop solution that combines human ingenuity with technology innovation to achieve desired lending outcomes.Summary – FSA focuses on the core components of financial statements viz P&L account, Balance Sheet, and Cash Flow Statements intending to identify the company’s true operational potential and overall economic strength. Perfios financial statement analysis tools are the best in the market. You can use it and feel the difference in comparison to other tools in the market.