Financial Statement Analysis

Financial statement analysis is the action of looking over a company’s financial statements to become better informed for making important decisions. By looking at past financial statements, some believe you can project a company’s future performance. The main documents you’ll hear about in financial statement analysis are the balance sheet, income statement, and cash flow statement.

Three common methods of analyzing financial statements include horizontal analysis, vertical analysis, and ratio analysis.

Horizontal analysis looks at the company’s finances over time, while vertical analysis looks at different departments within the company as a percentage of the total balance sheet. Ratio analysis calculates statistical ratios between groups of data, which can be helpful for more drilled-down, specific analysis.

Who does financial statement analysis? Investors and shareholders and people who did something very bad in a former life, because this is so often so dull. Who else? Well, management within the company. And competitors. (It's a big disadvantage for many companies to be public, to have to file their finances publicly...so competitors snarf all kinds of data, smell weakness, and prey upon the weak via this kind of analysis.)

Pretty much anyone looking to make money on the business analyzes these things comprising 10Qs, 10Ks, annual reports, 8Ks, and a bunch of other long-haired filings.