How to Analyze Financial Statements in Excel?

Financial statements analysis entails looking into a business’s financial records. It is essential for decision-making and performance evaluation.

Let’s look at a case study to illustrate how mastering how to analyze financial statements can be helpful.

Assume you’re the CEO of a software company. You want to analyze the company’s financial performance over the past years to help you with strategic planning. You examine the financial statements, including the balance sheet, income statement, and cash flow statement.

Your analysis reveals that profits and revenue have increased over the past three years. Also, the company has decreased its debt load and increased its cash balance.

Your company is flourishing, as the statements show. It has healthy cash reserves as well. Thus, it is in a solid position to undertake new ventures and grow its existing activities.

These insights will help you make sound strategic decisions.

Table of Content:

1. What is Financial Statement Analysis?
2. Who Uses Financial Statement Analysis?
3. Types of Financial Statement Analysis
4. How to Analyze Financial Statements in Excel?
5. Importance of Financial Statement Analysis
6. Wrap Up

Now, let’s discuss how to analyze financial statements in Excel.

What is Financial Statement Analysis?

Financial statement analysis entails examining a business’s financial information to evaluate its performance. Analyzing the qualitative and quantitative facets of its financial status is part of the process. This aids in assessing the company’s position, prospects, and potential risks.

Financial statement analysis typically involves the following steps:

1. Gathering data from sources such as the cash flow statement, income statement, and balance sheet.
2. Examining the data to find patterns and trends.
3. Analyzing the findings to study the business’s performance and prospects.
4. Applying the insights for purposes such as decision-making.

You can also assess liquidity, leverage, profitability, and efficiency through financial statement analysis. It can also compare a company’s performance to its peers and the industry average.

Who Uses Financial Statement Analysis?

Financial statement analysis has several uses. Below are some groups of financial statement analysis users:

• Investors

Investors gain valuable insights from financial statement analysis. It shows a company’s liquidity, profitability, debt levels, and other financial parameters. This contributes to informed investment decision-making.

• Financial Institutions

Financial institutions like banks use a company’s financial statements analysis to determine its financial performance. This aids in deciding whether or not to underwrite a bond offering, provide equity investment, or lend money.

• Business Owners

Financial statement analysis provides information on financial stability, profitability, business growth, and risk management. Business owners can spot trends and areas for improvement. Consequently, assess their financial status and make wise strategic choices.

• Accountants and Financial Analysts

A financial statement analysis provides an in-depth examination of a company’s financial status. This enables accountants and financial analysts to determine the company’s present state and predict its future. They can also spot risks, prospective financial growth areas, and any underlying issues that require attention.

• Government Regulators

Government regulators use financial statement analysis to assess the health of companies. Consequently, ensure that they are adhering to regulations.

Types of Financial Statement Analysis

There are three main types of financial statement analysis: horizontal analysis, vertical analysis, and ratio analysis.

1. Horizontal Analysis

Investors and business owners benefit from horizontal financial statement analysis. It enables you to assess the business performance throughout various time frames.

The most popular approach is comparing financial data between the current and the previous year. This makes it easier to spot trends and pinpoint areas necessitating improvements.

You can also compare financial data from multiple time frames to reveal potential irregularities.

2. Vertical Analysis

Vertical financial statement analysis compares one line item on a financial statement to another. It involves converting each line item into a percentage of total assets, liabilities, revenues, or expenses.

This enables you to evaluate the line items’ relative size and significance over time. Say a company’s total liabilities rise from 20% to 30% of the total assets. This shows the company’s debt load is higher than its total assets.

3. Ratio Analysis

Ratio analysis sheds light on a company’s financial health. These ratios are derived from essential elements of financial statements. These elements include the balance sheet, income, and cash flow statements.

Commonly used ratios include:

• Liquidity Ratios

Liquidity ratios assess the business’s ability to cover short-term debt and other financial obligations.

• Solvency Ratios

Solvency ratios measure a business’s ability to cover its long-term debt. This is by comparing the company’s total assets to its total liabilities.

• Profitability Ratios

Profitability ratios gauge a business’s capacity for profit generation. It constitutes metrics like return on assets (ROA), gross profit margin, and return on equity (ROE).

• Efficiency Ratios

Efficiency ratios evaluate and measure the overall efficiency of a company. These ratios compare the inputs to the outputs.

• Coverage Ratios

Coverage or debt service coverage ratios measure the business’s ability to meet debt obligations. These ratios indicate an entity’s ability to pay interest and repay the principal on a loan.

• Market Prospect Ratios

Market prospects ratios (MPRs) assess the potential success of a business venture. MPRs involve comparing a business’s expected performance against industry averages and competitors’ performance using financial and non-financial metrics.

How to Analyze Financial Statements in Excel?

We have discussed the financial statement analysis fundamentals. Now let’s see how to analyze financial statements in Excel.

This is where ChartExpo for Excel comes into play.

Why ChartExpo?

ChartExpo is a potent data visualization tool for experienced and novice users thanks to its intuitive UI.

You can visualize your financial data by creating insightful charts and graphs. This facilitates the spotting of trends, performance evaluation, and discovery of areas for growth and improvement.

Also, you can easily communicate your findings with stakeholders. You can use its customization options to simplify the gleaning of insights.

Furthermore, you don’t have to worry about the cost when using ChartExpo. It has a free 7-day trial, after which you can subscribe to its pocket-friendly plans.

How to Install ChartExpo in Excel?

1.  Open your Excel application.
2. Open the worksheet and click on the “Insert” menu.
3. You’ll see the “My Apps”.
4. In office Add-ins window, click on “Store” and search for ChartExpo on my Apps Store.
5. Click on “Add” button to install ChartExpo in your Excel.

ChartExpo charts and graphs are available both in Google Sheets and Microsoft Excel. Please use the following CTA’s to install the tool of your choice and create beautiful visualizations in a few clicks in your favorite tool.

Example

Let’s use an example to learn how to analyze financial statements in Excel with ChartExpo.

Assume the data below is from your company’s financial statement.

Locations	Revenue	Profit & Cost	Details	Amount
North America	Revenue	Expenses	Cost of Sales	109310
North America	Revenue	Expenses	Salaries	28278
North America	Revenue	Expenses	Cost of Marketing	76772
North America	Revenue	Profit	Tax	147231
North America	Revenue	Profit	Profit After Tax	713117
Asia	Revenue	Expenses	Cost of Sales	122371
Asia	Revenue	Expenses	Salaries	127010
Asia	Revenue	Expenses	Cost of Marketing	72919
Asia	Revenue	Profit	Tax	161953
Asia	Revenue	Profit	Profit After Tax	692948
Middle East	Revenue	Expenses	Cost of Sales	153080
Middle East	Revenue	Expenses	Salaries	93339
Middle East	Revenue	Expenses	Cost of Marketing	182517
Middle East	Revenue	Profit	Tax	78101
Middle East	Revenue	Profit	Profit After Tax	453762
Middle East	Revenue	Expenses	Maintenance

Follow through as I show you how to analyze the data with Sankey Chart.

• To get started with ChartExpo, install ChartExpo in Excel.
• Now Click on My Apps from the INSERT menu.

• Choose ChartExpo from My Apps, then click Insert.

• Once ChartExpo is loaded. Click on “Sankey Chart” from the list of charts.

• Click “Create Chart From Selection” button after selecting the data from the sheet, as shown.

• The Sankey Chart will look like as follows.

• If you want to have the title of chart, click on Edit Chart, as shown in the above image.
• To change the title of the chart, click on the pencil icon that is available very next to Chart Header.

• It will open the properties dialog. Under the Text section, you can add a heading in Line 1 and enable the Show option. Give the appropriate title of your chart and click on Apply button.

• Let’s add the $ sign to the numerical values. Click the highlighted icon to open the “Symbols” properties, then add the desired prefix. In this case, the $ sign.

• To hide the nodes with zero values, toggle the “Show zero value” option in the “Link” properties.

• Under the Link property, there is an opacity option where you can adjust the opacity of links. For now, let’s increase the opacity from 0.3 to 0.5.

• To change the node color, click on the pencil icon available with the node. Expand the Node properties and change color from the Node Color property. Click on the Apply button.

• For saving changes click on Save Changes. This will persist the changes.

• Your final chart will appear as shown below.

Insights

• At Level 1 (Locations), Asia has the highest contribution to revenue, which is $1.18M. This accounts for 37% of the total. The Middle East provided the least income, at $960.8k, 30%.
• Level 2 (Revenue) shows the company’s total revenue was $3.21M.
• At Level 3 (Profit & Cost), expenses accounted for 30% of revenue, which was $965.6k. On the other hand, the company earned a total profit of $2.25M, which was 70% of revenue.
• Level 4 (Details) reveals that out of the $2.25M profit, Taxes and Profits were $387.29M and $1.86M, respectively.
• Expenses were broken down into three nodes:
• Cost of Sales was $384.76K.
• Salaries came to $248.63K.
• Cost of Marketing was $332.21K.

Importance of Financial Statement Analysis

• Performance Evaluation

Performance evaluation is a critical aspect of financial statement analysis. It allows investors, lenders, and other financial stakeholders to assess a company’s financial health. Consequently, evaluate the company’s ability to generate profits and make wise investment decisions.

• Decision-Making

Financial statement analysis is crucial for well-informed strategic decision-making. It assists decision-makers in making sense of the data. Thus, evaluate the overall performance and financial health of the business. Then make critical decisions to aid the business in boosting earnings and reducing risks.

• Identifying Opportunities

Financial statement analysis spots opportunities by examining a company’s financial records. Then compare them to industry averages or other companies in the same industry. This comparison assists in identifying areas that are performing better or worse than expected.

• Risk Management

Risk management identifies, assesses, and controls various financial risks. Financial statement analysis helps you better understand and mitigate the financial risks the changing economic environment poses.

• Communication and Transparency

Financial statement analysis allows you to communicate financial insights to stakeholders. Consequently, it presents investors and other stakeholders with relevant information. This also helps to promote transparency and accountability inside the organization.

FAQs:

What is financial statement analysis?

Financial statement analysis looks at financial reports to evaluate a business’s financial situation. It entails assessing documents like the balance sheet, cash flow statement, and income statement.

What are the 3 types of financial analysis?

The three main types of financial analysis include;

• Horizontal analysis: Comparison of financial information over different time frames.
• Vertical analysis: Comparison of one line of item across various statements.
• Ratio analysis: Calculation of various financial ratios.

What are the 5 ways to Analyze the financial statements?

Here are five ways to analyze your financial statements:

• Conduct a ratio analysis.
• Conduct a horizontal analysis.
• Conduct a vertical analysis.
• Conduct a cash flow analysis
• Conduct a profitability analysis.

What are the 3 basic tools for financial statement analysis?

• The balance sheet gives an overview of a company’s assets and liabilities.
• The cash flow statement gives a detailed look at the cash balance.
• The income statement reveals the sources of the company’s revenues and its outgoing costs.

Wrap Up

Financial statement analysis lets you get a bird’s eye view of your business’s financial health and performance. It reveals trends, areas for improvement, and potential risks. Therefore, it is crucial to learn how to analyze financial statements.

Financial statement analysis takes into account the three main financial statements:

• The balance sheet.
• The income statement.
• The cash flow statement.

These statements show how well a company is managing its financial affairs.

There are three main types of financial statement analysis:

• The horizontal analysis compares data from various time frames.
• The vertical analysis compares one line item on a financial statement to another.
• Ratio analysis uses ratios of key financial metrics like liquidity ratios, solvency ratios, profitability ratios, etc.

You should be able to deliver a coherent story about your business. You need reliable, simple-to-understand visualizations to craft the best story. The good news is that you can analyze and visualize your company’s financial statements with ChartExpo for Excel.

You can create insightful charts and graphs. These will help you spot trends, evaluate performance, and discover areas for growth and improvement.