Financial statement analysis

Published on April 30, 2017   14 min

A selection of talks on Finance, Accounting & Economics

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Hi and welcome to Part Nine: Financial Statement Analysis in this HS Talks lecture series on Analyzing Financial Statements. My name is David Bond. Over the course of the first eight parts, we looked at the various steps involved in preparing financial statements. And now we turn our attention to how to use these financial statements to analyze the health of an entity.
A caveat before we begin. Financial statement analysis is only one part of the toolkit that can be used to assess a company. There is a range of other information in the annual report including the auditor's report and the management discussion and analysis section. In addition, annual reports are only one source of information about an entity, especially if it is a listed company. Listed companies are required to provide regular updates to the market, let alone other voluntary information they may disclose. There are also analyst and news reports, as well as reports in data about general macroeconomic conditions. But in saying all of that, an analysis of the financial statements is still worthwhile, and we'll look at some of the main methods used.
To begin, all financial analysis requires a point of comparison. Working out that a company has a 10% profit margin doesn't really tell us anything in isolation. We probably would like to know how that compares to the profit margin from last year to see whether they are improving or getting worse. We probably would also like to know how they compare to other companies, especially those in their industry. This could be done by comparing them to individual competitors or industry averages.
There are three main types of financial statement analysis that we'll cover here being horizontal, vertical, and ratio. We'll start with horizontal.