If you want someone to invest in your company, you should know how to write a financial statement analysis report? But, what is Financial Statement Analysis? Why do we need to prepare the financial statement analysis report? Well, the good part is that you don’t need to worry about that. Because you will find the solutions to all your problems in this article. This article will discuss how to conduct Financial statement analysis, methods used for the analysis, example of financial statement analysis, and lastly, how to write a financial statement analysis report. Let’s check it out.
What Is The Financial Statement Analysis?
Financial statement analysis is a process of studying a company’s financial statements. These statements include the Balance Sheet, the Income Statement, and the Cash Flow Statement of a company. Likewise, these statements are released on a quarterly and annual basis. You can find these statements in the annual report of the company. Thus, Financial statements are reports that show how much money a company has and how much money it is spending.
Financial statement analysis is usually done by analysts to know the overall health of the company. This analysis is commonly used for valuing the company and for audit purposes. Financial analysts also look at these financial statements and tell the company how much money they have and how much money they are spending.
What Does Financial Statements Include?
Now that you know about Financial statement analysis, let’s understand the different elements of financial statements. Basically, there are three major parts of financial statements. The following are the parts of the financial statements. Let’s check it out.
- Income Statement: Income Statement basically includes the “Sources of income and areas where money is spent“. It forms an important part of the financial analysis report. The major items of the Income statement are Revenue, gross profit, EBIT, EPS, Net income, Taxes, etc.
- Cash Flow Statement: Basically, a Cash flow statement tells us how balance sheet items can affect the cash flows of a company. It includes cash made from business operations, investments, and financing activities. In the end, we get the Net cash flow of the company.
- Balance Sheet: The Balance Sheet has items on either side saying what we owe and what others owe to us. Basically, there are two sides, Assets, and Liabilities. In other words, from one side “We get money/capital, and on another side, we are investing the same money into some assets.
Methods Of Financial Statement Analysis
There are various methods available to do the financial statement analysis. There are three methods of financial analysis: Horizontal and Vertical, and Ratio Analysis. Let’s check it out:
In this type of financial statement analysis method, each item will be shown as the percentage of a base item. Besides that, it is also used in the “Common-size statement.” For example, each item in the revenue statement will take Gross Sales as a base or denominator. Likewise, the balance sheet items are taken as a percentage of the total assets or liabilities.
Horizontal Analysis compares the past year’s data to the current year. It is also known as “Trend Analysis.” It enables analysts to determine the driving force of the company’s financial performance. Besides that, this type of financial analysis helps in identifying trends and growth patterns. Likewise, if you want to observe the trend for 4 years (2017-2020). So, you will take 2017 as your base year.
The name itself gives the answer. In Comparative Statements, you basically try to compare the previous year’s data to the current year’s data. It is a part of Horizontal analysis. For example, last year’s revenue of a company was $12.5 million, and this year they earned $22.2 million. When you compare both years, there is an increase of $9.7 million.
Ratio analysis uses different financial ratios to figure out if a company is doing well or not. The ratios used in the financial analysis can tell you if a company has enough money or not. You can also use ratios to compare stocks within the same industry. Ratios are also a great way to see what is happening with a company.
Ratios can also tell you if a company is doing better than other companies in the same industry. Likewise, they can be used to compare a company’s numbers to other companies in the same industry, or even to the overall economy. If a company’s ratios are better than the industry average, that could mean the company is doing better than other companies in the industry and vice versa.
Cost-Volume-Profit Analysis (CVP)
This technique for financial analysis represents how cost and volume can affect profits. CVP Analysis studies the sales price, fixed costs, variable costs, the volume sold. It also ascertains the selling price of a product through this analysis. Thus, this proves to be a great tool for financial analysis.
Fund Flow Analysis
In addition, funds refer to money that is used to pay for expenses. Flow refers to the movement of money, such as the movement of cash into or out of a business. Therefore, this financial analysis technique helps to look at the Balance Sheet of a company to see how much money the business had at the end of the previous year. It also helps to see if the business had more or less money at the end of the previous year than at the beginning of the previous year.
How To Do A Financial Statement Analysis Of A Company?
Now that you’ve learned about the many tools we will use in the financial analysis of a company. Let’s look at the 7 steps that make up the financial analysis process of a company.
Step 1: Collection of financial statements
The first step is to find the company’s financial statements. You can find them in the company’s annual report or on the U.S. Securities and Exchange Commission EDGAR Database.
Step 2: Analyzing & Examining The Annual Report
The next step is to “Read the annual report” and look at the income statement and balance sheet. You need to figure out how much money they made this year as compared to last year. The analysts also need to look at how much money they have in the bank compared to last year.Sometimes, you will find that the company does not make much money. If you find this, you need to keep looking for information about the company. Please read the notes because they might be important.
Step 3: Calculation And Comparison Of The Ratios
After you analyze the financial statements, you can use the financial ratios to see how well the business is doing. There are different ratios like Current ratio, P/E ratio, Quick ratio, ROE ratio, Debt to equity ratio, etc. Analysts use ratios to compare different companies and see how they are doing. They use ratios to compare companies and see how they are doing.
Step 4: Calculate The Risks
The next step is to see if your business is prone to any risk. Every business is prone to some or other risk. Before investing, even investors look at the risks involved in the company. Thus, you need to conduct a test to determine how much risk is your company having. This test involves identifying the risks, taking steps to control them, and lastly reviewing them.
Step 6: Provide suitable suggestions
Once you analyze the financial statements, you can give your opinion. If a company has a large amount of debt, it means they have a lot of debt. Investors and lenders think companies with a lot of debt are a higher risk, so they give them a higher interest rate. You can tell them to pay off their debt or restructure it.
How To Write A Financial Statement Analysis Report?
Now that you know how to conduct a Financial statement analysis, let’s understand how to write a financial statement analysis report. This financial analysis report will help the investors in their investment decision. The following are the steps on how to write a financial statement analysis report. Let’s check it out.
1. Give The Company's Overview
The First step towards writing the financial statement report is to “Give an overview of the company“. Give a brief history of the company, description of the business, etc. This overview will help the investors determine whether the company is good or not.
The next section is Investment when you write a financial statement analysis report. You need to “Give the pros and cons of investing in this company“. Here, you also need to give a financial analysis of the company. The financial statement analysis will discuss the company’s cash flows, levels of debts, etc. Besides that, also discuss the different ratios and trends that are going on in the industry.
3. Perform Company's Valuation
The third section while writing the report is to “Find the value of a company“. Valuation of a company can be done in three ways; DCF model, Relative value, and book value. This valuation will help the investors understand the value of the company.
4. Do Risk Analysis
The next section will include the risk analysis of the company. In other words, you need to “Discuss the risks of the company“. Give details of the factors that can turn out to be a risk for the company. Analyze the main risks and examine them.
Note: Risks for every company and industry will be different.
5. Financial Statements Details
In the next section, try to give a “Brief summary of the financial statements” of the company. Also, you can include an explanation of these statements, pie charts, graphs, etc. These statements include;
- Income statement
- Cash Flow statement
- Balance Sheet
Lastly, give a “Summary or brief of what you have discussed in this report“. In addition, also highlight the key points of the report.
Example Of A Financial Statement Analysis
Financial Statement Analysis helps the investor with the decisions of whether they should invest or not. If you wish to do a financial statement analysis of a company, here are some examples we have discussed in our articles. A few example of financial statement analysis includes that of Apple. We have also provided financial analysis of other companies like Toyota, Walmart, China National Petroleum, etc.
A financial statement analysis report, if done correctly, is an extremely powerful and effective tool. It can help you identify and evaluate the strengths and weaknesses of a company, as well as its future performance. If you are looking for a way to expand your business, the financial statement analysis might be a very good strategy for you. It is a simple way to increase your profit margins and it does not require a lot of time for preparation.
In this post, we will present to you a basic outline on how to write a financial statement analysis report, and discuss how you can use it to your advantage. Also, we have given an example of financial statement analysis to help you understand better. We, hope this article was helpful to you. If you have any questions, comment down below.