The purpose of a financial analysis report is to present company financial information in a way that is useful and easy to understand. At a minimum, financial analysis reports analyze trends and changes in company performance. Most financial analysis reports also incorporate competitor data and compare company performance to industry standards.
Balance Sheet and Income Statement
Analyze financial statements to uncover any trends from the previous year. Briefly compare the current year’s and previous year’s income statement and balance sheet and look for any large changes year to year. After identifying big-ticket items, analyze the income statement and balance sheet using horizontal analysis to identify smaller changes. To perform horizontal analysis, express each account value is as a percentage of the account value in the oldest financial statement. For example, if a business has assets of $500 in 2010 and $750 in 2011, the analyst would list assets as 100 percent in 2010 and 150 percent in 2011. Highlight unusual or significant financial trends in first section of your report.
Cash Flow and Equity
Although the income statement and balance sheet are the most widely used financial statements, the statements of cash flow and stockholder’s equity also provide valuable information. Analyze company cash flow for the past few periods and examine where the company is spending money. Too little cash means the company may have liquidity problems if operations go south. Along with cash, examine changes in equity. Highlight growth or shrinkage in the retained earnings account and mention any significant change in outstanding stock.
After analyzing year-over-year changes and trends within the company, shift your focus outward. Use common-sized financial statement to compare company performance with industry competitors. In a common-sized income statement, each account is expressed as a percentage of total revenue. Common-sized balance sheets express each account as a percentage of total assets. Common-size income statements make it easy to compare where companies of different sizes are spending and earning money. Common-sized balance sheets make it easy to compare the relative amount of liability and equity a company maintains.
Financial ratios are another tool that allows readers to easily compare company performance to others in the industry. Focus on financial ratios that are relevant to your audience. For example, creditors and lenders are generally most interested in liquidity and leverage ratios. Efficiency ratios provide helpful information for internal managers while outside investors are often concerned with profitability ratios. Compare the company financial ratios to the industry average to give the reader a sense of how the company is performing.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.