3. 3
1
• Why Financial Statements Analysis is Important
2
• Financial Statements Analysis Used by
3
• Methods of Financial Analysis
4. 4
Why Financial Statements Analysis is Important
Are important as:
• Project future earnings and cash flow
• Evaluate a firm’s flexibility (the ability to
grow and meet obligations even when
unexpected circumstances arise)
• Assess management’s performance
• Evaluate changes in the firm and
industry over time. Compare the firm
with industry competitors
5. 5Financial Statements Analysis Used by:
• Assessing past
performance and
current financial position
• Making predictions
about the future
profitability and
solvency of the
company as well as
evaluating the
effectiveness of
management
External Users Internal Users
• Planning,
evaluating and
controlling
company
operations
• Creditors
• Shareholders
• Tax authorities
• Outside investors
• External auditors
• Customers
• Bankers
• Managers
• Board of
directors
• Internal auditors
• Sales staff
• Budget officers
• Controllers
• CEO and CFO
6. 6
Methods of Financial Analysis
Horizontal Analysis
Vertical Analysis
Trend Percentages
Ratio Analysis
7. 7Methods of Financial Analysis
Horizontal Analysis
Using comparative
financial statements
to calculate dollar
or percentage
changes in a
financial statement
item from one
period to the next
8. 8Methods of Financial Analysis
• For a single financial
statement, each
item is expressed as
a percentage of a
significant total
• e.g. all income
statement items are
expresses as
percentage of sales
Vertical Analysis
9. 9Methods of Financial Analysis
• Show changes over
time in given
financial statement
items
• Can help evaluate
financial information
of several years
Trend Percentages
10. 10Methods of Financial Analysis
• Expression of logical relationships
between items in a financial statement
of a single period
• e.g. percentage relationship between
revenue and net income
Ratio Analysis
• Can be expressed in three different ways:
• Ratio (e.g. current ratio of 2:1)
• % (e.g. profit margin of 2%)
• $ (e.g. EPS of $2.25)
