Financial report analysis

Financial report analysis - is a useful form of finding the real situation in the company. Objective assessment of the company’s financial statements helps managers and investors to see a clear picture and situation in the company. To make an analysis usually balance sheet and income statement are used for the period of twelve months of the same year.

Depending on the size of the company, the analysis can be different and different results can be found. Particular strategy of the company can give totally different results in the analysis. If the company is based on debt to make its activities, its financial report analysis will differ from the company’s which is not borrowing at all. So before making comparisons it is useful to check whether the other company is also using similar strategies and is similar size to comparing one.

The financial report analysis can show the benefits and costs of the company, so for investor it can be as a reliable source of information before making investment. There are several strategies of financial report analysis: it can be vertical, horizontal or ratio analysis. Vertical analysis is looking at the financial statement of the same year and is comparing the entries form the financial statement: “Comparing to the cost of goods sold, the sales are very high, which shows high mark-ups in the company and high value and quality of its products”. Horizontal analysis is looking at the same entries in the financial statements but in a period of several years. In example, it is showing how the assets of the company are changing during five year time - it is increasing or not or maybe fluctuating because of cyclicality, so for the investor it is useful to wait for the decrease of the cycle and invest before the growth. Ratio analysis is used to analyze main financial indexes by using leverage ratios, profitability ratios, activity ratios and liquidity ratios. Ratio analysis can be also done in horizontal aspect in order to see how ratios are changing in a period of time.

When analyzing balance sheet, we can see what the structure of assets and liabilities is. If we look at it from horizontal view we can see how it changed in a period of time: we can see if the company is reducing its liabilities or how its long term debt changed. Using balance sheet analysis we can find the relations between assets, liabilities and shareholder’s equity. Liquidity and leverage ratios can be calculated using balance sheet analysis.

When analyzing income statement we can find out the results of typical, financial and other operations made in the company. Income statement is usually given in a horizontal aspect, because it shows current and previous year. Using income statement we can see the efficiency of the company and calculate margins, profitability and activity ratios. It also shows what are the sales and expenses, and what mark-ups are applied for the products or services. Income statement analysis includes not only operations of the company, but also evaluates such factors as depreciation and taxation.

As it was said, it is useful to make financial report analysis, because it reflects the current and previous situation of the company. Explanations of what incurred these changes can be found and significant events can be described in this analysis as well. Financial report analysis can be also used when comparing several companies, because it describes the most important aspects of the firm, so for the investor it is easier to make a decision when he sees the whole picture of the company in one place with already made analysis and explanations.