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Home > Blog > Microsoft Excel

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.

how to analyze financial statements

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 a Financial Statement?
  2. Understanding Financial Statement Analysis
  3. Video Tutorial: How to Analyze Financial Statements?
  4. Key Components of Financial Statements
  5. Types of Financial Statements
  6. What are Financial Ratios?
  7. How to Analyze Financial Statements: Step-By-Step
    1. Step 1: Collect And Arrange Data
    2. Step 2: Install ChartExpo
    3. Step 3: Select Your Chart For Financial Statement Analysis
    4. Step 4: Create a Chart From the Selection
    5. Step 5: Apply Title on The Chart
    6. Step 6: Add and Customize Chart Properties
    7. Step 7: Save All Changes
    8. Step 8: Your Financial Statement Look Below
  8. Importance of Financial Statement Analysis
  9. How to Read Financial Statements For Companies?
  10. Financial Statement Analysis FAQs
  11. Wrap Up

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

What is a Financial Statement?

Definition: A financial statement is a detailed report that provides an overview of a company’s financial performance and position. It typically includes three main components: the balance sheet, which shows assets, liabilities, and equity; the income statement, which details revenues and expenses; and the cash flow statement, which tracks cash inflows and outflows.

Understanding 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.

Video Tutorial: How to Analyze Financial Statements?

Key Components of Financial Statements

  • Income Statement

Overview of Profitability
Displays the company’s revenues, expenses, and net profit or loss over a specified period, providing insights into its operational performance.

  • Balance Sheet

Snapshot of Financial Position
Presents a detailed view of the company’s assets, liabilities, and shareholders’ equity as of a particular date, revealing its financial stability and structure.

  • Cash Flow Statement

Cash Movement Summary
Illustrates the cash inflows and outflows from operating, investing, and financing activities, showing how cash is generated and used during a specific period.

  • Statement of Changes in Equity

Equity Evolution Report
Details the changes in equity accounts, including retained earnings and capital contributions, over a reporting period, reflecting how equity evolves with business activities.

Types of Financial Statements

1. Balance Sheet

Description: The balance sheet provides a comprehensive snapshot of a company’s financial position at a particular point in time, detailing its assets, liabilities, and shareholders’ equity.

Example:

  • Assets: Includes items like Cash, Accounts Receivable, Inventory, and Property.
  • Liabilities: Comprises debts such as Accounts Payable and Long-Term Loans.
  • Equity: Represents ownership interests like Common Stock and Retained Earnings.

2. Income Statement

Description: The income statement summarizes a company’s financial performance over a particular period by listing revenues, costs, and expenses to determine net profit or loss.

Example:

  • Revenue: Total income from Sales and Services.
  • Expenses: Costs such as Cost of Goods Sold, Salaries, Rent, and Utilities.
  • Net Income: Calculated as Revenue minus Total Expenses, indicating profit or loss.

3. Cash Flow Statement

Description: The cash flow statement details how cash moves in and out of the company across operating, investing, and financing activities, providing insights into cash management.

Example:

  • Operating Activities: Includes cash receipts from customers and payments to suppliers.
  • Investing Activities: Covers cash used for purchasing equipment or receiving funds from asset sales.
  • Financing Activities: Tracks cash flows associated with issuing shares or repaying debts.

What are Financial Ratios?

Financial ratios shed light on a company’s financial health. These ratios are derived from essential elements of financial statements. These elements include the balance sheet, income statement, and cash flow statements. An income statement template can help organize and present this information effectively.

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: Step-By-Step

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 the office Add-ins window, click on “Store” and search for ChartExpo on my Apps Store.
  5. Click on the “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.

Step 1: Collect And Arrange Data

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 the Sankey Chart.

Step 2: Install ChartExpo, and click My Apps

insert chartexpo in excel
  • Choose ChartExpo from My Apps, then click Insert.
open chartexpo in excel

Step 3: Select Your Chart For Financial Statement Analysis

search sankey chart in excel

Step 4: Create a Chart From the Selection

create financial statements in excel
  • The Sankey Chart will look as follows.
edit financial statements in excel

Step 5: Apply Title on The Chart

settings financial statements in excel

Step 6: Add and Customize Chart Properties

update financial statements in excel
  • To hide the nodes with zero values, toggle the “Show zero value” option in the “Link” properties.
maintain financial statements in excel
  • 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.
set financial statements in excel
  • 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.
set financial statements in excel

Step 7: Save All Changes

save financial statements in excel

Step 8: Your Financial Statement Look Below

financial statements in excel

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:
  • The cost of Sales was $384.76K.
  • Salaries came to $248.63K.
  • The 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. By utilizing tools such as Excel or Power BI for income statements stakeholders can better 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, enabling them to evaluate the overall performance and financial health of the business, including key metrics like return on investment capital. This insight helps in making 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.

How to Read Financial Statements For Companies?

  1. Start with the Income Statement: Review the company’s revenue, expenses, and net income to understand profitability.
  2. Analyze the Balance Sheet: Examine assets, liabilities, and equity to assess financial stability and capital structure.
  3. Review the Cash Flow Statement: Focus on cash flows from operations, investing, and financing to gauge liquidity and cash management.
  4. Look for Notes and Disclosures: These provide context, explaining accounting policies, risks, and significant events.
  5. Compare with Prior Periods and Benchmarks: Evaluate performance over time and against industry benchmarks for a complete picture.

Financial Statement Analysis 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.

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