Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.
Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques include horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects line items have on other parts of the business and also the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.
What we will study in this module are indicators, similar to watching the dashboard on your car. The speedometer gives you information, as does the temperature gauge and the gas gauge. Even if the car seems to be running fine, a sudden spike in engine temperature could give you a heads up to coming trouble, and at the garage, a mechanic may run further diagnostics using more sophisticated tools.
What you’ll be learning to do in this Module is run diagnostics on companies using the financial statements.