Methods for Financial Statement Analysis

The huge number that appears on the financial statement of a company could be intimidating to the investors. But analyzing the financial statements will open a goldmine of information in front of you. Companies use financial statements to disclose information regarding financial performance. These statements could be used for analyzing whether to make investments in a company or not.

What are the key methods for analyzing financial statements? There are two main methods of analyzing a financial statement the first method is the use of horizontal and vertical methods and the second method is the use of ratios.

Horizontal analysis involves the comparison of financial information over a series of reporting periods, whereas vertical analysis method means the proportional analysis of a financial statement. This means every line term on a financial statement is stated as a percentage of gross sales, each line item on a balance sheet is considered as a percentage of total assets.

The second method for financial statement analysis is the use of many types of ratios. Ratios are used to calculate the relative size of one number in a relation to another. Once the ratio is calculated you can compare it with the same ratio calculated for a prior period or that is based on a certain industry average, to judge if analyzing financial statements is the use of many kinds of ratios. You use ratios to the company is performing in accordance with expectations.

To understand more on the different types of financial statements and what their intended purpose is, how to identify key operating trends and prepare financial ratios on a company's financial statements, the importance of reading the footnotes that accompany financial statements and provide an understanding of how these footnotes often hide important messages attend this webinar How to Analyze Financial Statements and Uncover the Key Trends and Hidden Messages