Financial Statements Analysis is an art to convert and transform data from financial statements into a meaningful transformation. So, it helps in informed decision-making. As a result, Financial Analysts need analytical tools to perform a Financial Statements Analysis of the Company. There are two types of analysis/comparisons;
- Internal Analysis/comparisons.
- External Analysis/comparisons.
EXPLANATION:
Internal Analysis/comparisons involve a comparison of the company’s financial ratios over time to detect improvements and deviations from goals already set in corporate financial strategy.
External Analysis/comparisons involve carrying out comparisons of the company’s financial ratios with other firms in a similar business within the industry.
Therefore, such analysis helps companies out to compute projected financials.
WHAT IS FINANCIAL RATIO?
In order to perform financial statements analysis, analysts use a most useful tool which is computing the financial ratios of the company.
The financial ratio is an index that relates two items of financial statements. It is determined by dividing one by the other. There are two types of ratios financial analysts use in the Financial Analysis of the company.
- Balance Sheet Ratios: Both Numerator and Denominator are balance sheet items
- Income Statement Ratios and Income Statement/Balance Sheet Ratios: Both Numerator and Denominator are income statement items and Income statement/Balance sheet items.
