Financial statement analysis provides essential information regarding a company’s financial health. It reviews current and past performance, and based on these factors, the nature of future performance is determined. Financial statement analysis is important for internal associates and external stakeholders, as it provides detailed information regarding the company's financial worth. Financial statement analysis involves examining key documents like balance sheets, income statements, and cash flow statements.
Now, that we understand the three main components of a balance sheet: - the assets, liabilities and equity, we can further dive into the next financial statement; the income statement.
Let’s move to the third important statement required for financial statement analysis: the cash-flow statement.
Operational Activities: - These are the daily tasks carried out by the company, including sales, expenses, and manufacturing costs.
Financial Structure: This refers to the company's financial framework, including debt and equity.
Investment Opportunities: - This includes the company's investment strategy, such as acquiring land, property, or essential equipment.
Now, we have learnt the importance of financial statement analysis, the types of statements and the various forms of analysis used. As a beginner, this would be enough to keep you proceeding in the line and dive deeper to understand the mechanisms at its core.
What are the 3 Important Financial Statements?
During financial statement analysis, the key documents to review are the balance sheet, income statement, and cash flow statement. Understanding each of these statements thoroughly is crucial for enhancing your efficiency.The Balance Sheet
The balance sheet, in straightforward terms, outlines the assets, liabilities, and equity of your organisation. Assets are the valuable components of your business. They include cash, investments, real estate, and equipment—essentially, anything you own that has financial worth. Liabilities refer to the constituents of the company, where the company owes to others. Equity represents a company's financial value after subtracting its liabilities from its assets. This includes debts, loans, and other obligations.Now, that we understand the three main components of a balance sheet: - the assets, liabilities and equity, we can further dive into the next financial statement; the income statement.
The Income Statement
The income statement is also understood as the profit or loss statement, which in essence explores the revenue generated and the losses incurred by the company. It is an essential part of the financial statement analysis as it gives a detailed view of the company’s financial standards and welfare. The revenue generated through product sales or the company’s services provided contributes to the profit statements. The expenditure statement comprises the cost of machinery, operational costs, taxable amount, etc. The statement provides information regarding the financial state of the company, whether the profits are better than the previous year or if a net loss has occurred in the financial year.Let’s move to the third important statement required for financial statement analysis: the cash-flow statement.
The Cash-Flow Statement
The cash-flow statement, as the name suggests, accommodates all the incoming cash flows (inflows), as well as outgoing cash flows (outflows). The sectional division of the cash flow statement provides us with 3 main parts: -Operational Activities: - These are the daily tasks carried out by the company, including sales, expenses, and manufacturing costs.
Financial Structure: This refers to the company's financial framework, including debt and equity.
Investment Opportunities: - This includes the company's investment strategy, such as acquiring land, property, or essential equipment.
Types Of Analysis For The Financial Statements
There are 3 significant methodologies applied by the financial analysts in financial statement analysis: - Horizontal analysis, Vertical Analysis and Ratio Analysis. Horizontal analysis is used to compare horizontal components of the statement. It includes the formation of a baseline and comparing the same over a period of time. Vertical analysis shows the value of a line item as a percentage of another line item. This gives us the benefit of comparing how line items affect each other. Ratio analysis allows you to monitor a company's performance over time.Now, we have learnt the importance of financial statement analysis, the types of statements and the various forms of analysis used. As a beginner, this would be enough to keep you proceeding in the line and dive deeper to understand the mechanisms at its core.