Financial statement analysis is the process of evaluating a company’s financial position and financial future by reviewing its past and present financial statements and projecting those forward. Analysts, investors, government, regulators, stakeholders and executives undergo this process in order to evaluate a company or make sounder business, investing decisions. The financial statements most often used as a gauge for analysis include: the balance sheet, cash flow statement, income/P&L statement and equity/earnings statement.
There are five commonly used types of financial statement analysis:
- Fundamental analysis: The threefold process of analyzing company, the economy and industry
- DuPont analysis: Analyzing return on equity through profit margin, total asset turnover and financial leverage
- Horizontal analysis: A comparison of financial information over time by comparing past and present statements against one another
- Vertical analysis: Analyzing financial statements in percent through normalization
- Financial ratios: Analyzing a company based on its liquidity, profitability, activity and leverage ratios