3 Techniques Used in Financial Statement Analysis

The best investment firms in New York offer various financial services to their clients. Such services include stock selection, asset allocation, creation and implementation of portfolio strategy, monitoring of current investments, and financial statement analysis.

Financial statement analysis is used by external stakeholders and internal constituents for decision-making purposes. While external stakeholders need it to have a clear picture of the organization’s overall health, business value, and financial performance, internal constituents use this as a tool to manage the organization’s finances.

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What are the 3 Techniques Used in Financial Statement Analysis?

Horizontal Analysis

This compares historical data over a specific number of accounting periods. Historical data includes ratios and line items. In most cases, this technique uses absolute or percentage comparisons where the percentage of the amount in the baseline year is used to express the numbers in every succeeding period. It’s important to note that with horizontal analysis or base-year analysis, the baseline amount is listed as 100%.

Vertical Analysis

This method lists each line item as a percentage of a specific base figure within the financial statement. The line items that you’ll see on the income statement will be identified as gross sales percentage. On the other hand, the line items that are on the balance sheet will be identified as a percentage of liabilities or total assets.

Also, vertical analysis of a cash flow statement would show that every cash inflow or outflow is expressed as a percentage of all cash inflows.

Ratio Analysis

This quantitative method aims to gain insight into the operational efficiency liquidity, as well as the profitability of an organization by analyzing its financial statements. These include the income statement and the balance sheet.

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