What types of techniques are used for Financial statement analysis?

What types of techniques are used for Financial statement analysis?

The procedure for analyzing and interpreting a company's financial statements in order to get a knowledge of its financial health and performance is known as financial statement analysis. Financial statement analysis employs a number of techniques, including:

1. Ration Analysis:-

 Ratio analysis is the process of calculating financial ratios that measure the relationship between different financial statement components. Liquidity ratios (such as the current and quick ratios), profitability ratios (such as return on assets and return on equity), and efficiency ratios are other examples (such as inventory turnover and asset turnover).

2. Horizontal Analysis :- 

Horizontal analysis is the process of comparing financial statement data from one period to the next in order to find changes or patterns. Comparing the income statement for 2021 to the income statement for 2020, for example, might assist in identifying changes in revenue, expenses, and net income.

3. Vertical Analysis:- 

Vertical analysis is examining how many of each type of item there are in a financial statement. For instance, a vertical analysis of an income statement might entail figuring out what portion of revenue is spent on various expenses, such as cost of goods sold, salaries, and marketing costs.

4. Cash Flow Analysis:- 

Cash flow analysis entails examining a company's cash flow statement to ascertain how much money is made or spent on operations, investment, and financing. This data can be used to evaluate a business's capacity for cash generation and spot potential cash flow issues.

5. Trend Analysis:-

Analyzing financial statement data over time to spot performance trends is known as trend analysis. For instance, analyzing sales growth over the last five years can reveal if a company is expanding or contracting.

In general, financial statement analysis is a crucial tool for managers, creditors, and investors to comprehend the financial performance and health of a company.