Common sizing a balance sheet

FINANCIAL STATEMENT ANALYSIS 1

FINANCIAL STATEMENT ANALYSIS 2

Financial statement analysis

This is a traditional company’s financial report analysis tool based on the financial ratios. The financial ratios acquire information from the company financial statements and are used to calculate economic indicators of the company which are used to compare among companies or industries performance or financial standard (Vogel, 2014).

Vertical Analysis

The vertical financial statement analysis is a financial analysis that is conducted using the common size company financial statements. This statement shows the item on the financial statement in percentage for every statement line item (Saleh et al., 2017). For instance, the income statement will show the percentage of each line item based on the company’s gross sales. It is also termed as common-sizing or normalization. This analysis makes a statement that is adjusted as the percentages of sales or may be in relation to other totals of the accounts categories over a single financial period. For example, the vertical analysis executed on the balance sheets will make use of the total assets and the total liabilities. In the event the expenses sum-up to 69 percent relative to net sales, the net income will be represented by the remaining 31%. The statement will give the percentage the line of items over the total expenses of the company. This will enable the company make decision on reduction of the expenses comparatively to the revenue. It will also depict the stability and health status of the company in business and identify the areas of weakness that must be handled (Vogel, 2014).

Horizontal Analysis

The horizontal analysis does the comparison of the financial results of the company over time. The analysis compares for example the financial incomes statement or the balance sheet of the business for a given period of time to help determine the actual trend of the business performance. The financial statements of various years are put side by side so that the business stakeholders can review particular time over several periods in order to identify the performance of the revenue, expenses, liabilities and assets. For example, if the base year was 2008, and the 2009 and 2010 financial revenues were 108% and 120%, then the stakeholders will see growing percentage revenue and thus will strengthen the mechanism in place but also see to find out the most efficient mechanism that would improve the returns even more. The financial statement will therefore reveal the trend of the company and thus give the general performance of the company which will attract the public interest or the interests of the investors (Saleh et al., 2017).

Ratio Analysis

Generally, the financial analysts employ various ratios like profit margin, inventory turnover, profitability ratios, liquidity ratios, leverage ratios and activity ratios, to compare with the ratios of the other companies or the rule of thumb that govern the ratios. Liquidity ratios determine the ease of the company to turn its assets cash in the event it faces financial difficulties. High ratio will tell the ease the company can acquire cash from its assets to meet its operational expenses in the event the financial times are hard. This therefore, will determine the strength of the company to remain in trade in hard financial times. The profitability ratios identify the expected revenue or the amount of cash a company should create to breakeven with its initial capital. High ratio depicts the break even or the high profit the business is able to make within its operations. The activity ratios detail the soundness of management of the company’s resources. The length the company takes to pay its debts, and the period taken to receive payments for its services. The leverage ratios portray the level of reliance on debts in order to fund its operations the higher the ration the higher the reliance of the company to pay for its operations using debts. This is a healthy stand point meaning that the company does not need to strain to attain its resources but is at a point where its debts can pay for its operations. This also means that the duration for receiving and paying debts is short which means that the company does have low bad debts or money lying idle in the debts (Saleh et al., 2017).

References

Saleh, M. M. A., Alkasasbeh, L. A. M., & Bader, A. A. (2017). The Role of Financial Analysis Tools in Granting Loans. Field Study on Banks Operating within Aqaba Special Economic Zone. International Journal of Academic Research in Accounting, Finance and Management Sciences, 7(1), 75-85.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.