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.
Now, let’s discuss how to analyze financial statements in Excel.
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:
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.
Financial statement analysis has several uses. Below are some groups of financial statement analysis users:
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 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.
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.
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 use financial statement analysis to assess the health of companies. Consequently, ensure that they are adhering to regulations.
There are three main types of financial statement analysis: horizontal analysis, vertical analysis, and ratio 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.
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.
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 assess the business’s ability to cover short-term debt and other financial obligations.
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 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 evaluate and measure the overall efficiency of a company. These ratios compare the inputs to the outputs.
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 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.
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.
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.
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.
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.
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.
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 identifies, assesses, and controls various financial risks. Financial statement analysis helps you better understand and mitigate the financial risks the changing economic environment poses.
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.
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.
The three main types of financial analysis include;
Here are five ways to analyze your financial statements:
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:
These statements show how well a company is managing its financial affairs.
There are three main types of financial statement analysis:
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.