Question

Financial Statement Analysis

Identify the tools used for Financial Statement Analysis

               Horizontal Trend Analysis

• It is also known as trend analysis. And it evaluates a series of financial statement data over a period.
• It is used primarily in intra company comparisons. Financial statements facilitate this type of comparison because:

1. Each of the basic financial statements show a minimum of a year
2. Summary of selected data will show 5-10 years.

               Vertical Common Size Analysis

• It evaluates financial statement data expressing each item in a financial statement as a percent of a base amount.
• It is used in both intra and inter company comparisons.

               Ratio Analysis   

• It is used to calculate the performance, liquidity and solvency of a on organization. It expresses the relationship among selected items of financial statement data
• It is used in all three types of comparisons, I.e, Intra, Inter and industry.

                              Performance

                              Liquidity

                              Solvency

Answer 1

• Horizontal trend analysis : Horizontal trend analysis is the analysis that is usedt to compare the trend of the company over a period of time. In horizontal trend analysis all components of the balance sheet are compared with the other period like cash balance, debt balance sales, cost of good sold, gross profit, net profit, dividends e.t.c , they all are compared over different time period, may be quarterly or annually to assess the trend. The statement can show year on year data as well as quarter on quarter data, it depends on the requirement.
• Vertical Common size analysis: Vertical common size analysis is done where one component of the balance sheet is represented as a percentage of the whole, like current asset can be presented as a percentage of total assets. For Income statement, its components are represented as a percenatge of sales or revenue. It helps in determing where is the most allocation of resources.
• Ratio Analysis : Ratio analysis is done to compare the company performance with its peers or it can also be done with reference to it's previous quarter or previous year performance. Ratio analysis can be done to assess the performance, liquidity as well as solvency position of the company.

For measuring the performance of the company the different metrics used are net profit margin, gross profit margin, return on equity, e.t.c. for measuring the liquidity position of the company current ratio, acid test ratio. for measuring the solvency position of the company, ratio like debt to equity, EBIT to interest , EBITDA to interest, this ratio basically measures that the company will be able to meet its obligation of Interest payment to its debt holder.