Financial Statement (FS) Analysis -is the process of evaluating risks, performance, financial
health and future prospects of a business by subjecting financial statement data to
computational and analytical techniques with the objective of making economic decisions.
Three kinds of Financial Analysis
1. Horizontal Analysis
2. Vertical Analysis
3. Financial Ratios
1. Horizontal Analysis- also called trend analysis, is a technique for evaluating a series of
financial data over a period of time with the purpose of determining the increase or
decrease that has taken place.
-Horizontal analysis uses financial statements of two or more periods
-All line items on FS may be subjected to horizontal analysis
-Only the simple year-on-year (Y-O-Y) grow covered in this lesson
-Changes can be expressed in monetary value (peso) and percentages computed by
using formulas:
Peso Change = balance of current year-Balance of prior year
Percentage change= (balance of current year-balance of prior year)
(Balance of prior year)
2015
250,000.00
SALES
Peso Change
=
=
Percentage Change
=
2014
175,000.00
250,000-175,000
75,000.00
(250,000-175,000)
175,000.00
X 100
=
75,000.00
175,000.00
X 100
=
42.86%
Vertical Analysis- also called common-size analysis, is a technique that expresses each
financial statement item as percentage of base amount
-For Statement of Financial Position, the base amount is Total Assets.
-Balance of account/ Total Assets
-From the common-size Statement of Financial Position, the analyst can infer the composition of
asset and the company’s financing mix.
Example:
Cash
Accounts Receivable
Inventory
Equipment
Total Assets
200,000.00
400,000.00
250,000.00
550,000.00
1,400,000.00
% of Asset
14.29%
28.57%
17.86%
39.29%
100.00%
Accounts Payable
Notes Payable
Owners Capital
Total Liabilities & OE
300,000.00
400,000.00
700,000.00
1,400,000.00
21.43%
28.57%
50.00%
100.00%
Analysis: The largest component of asset is Equipment at 39.29%. Cash is the smallest
component at 14%. On the other hand, 50% of assets are financed by debt and the other half is
financed by equity.
-For Statement of comprehensive Income, the base amount is Net Sales.
-Balance of account/Total Sales
-This will reveal how “Net Sales” is used up by the various expenses
-Net Income as a percentage of sales is also known as the net profit margin.
Example:
% of Net Sales
Net Sales
Cost of Good Sold
Gross Profit
Operating Expenses
Net Income
900,000.00
400,000.00
500,000.00
200,000.00
300,000.00
44.44%
55.56%
22.22%
33.33%
Analysis:
-Cost of goods sold is 44% of sales. The company has a gross profit rate of 55.56%
Operating expenses is 22% of sales.
-The company earns income of P.33 for every peso of sale. Gross profit generated for every
peso sale is P.55