What is Financial Statement Analysis?

Financial Statement Analysis is the process of understanding the fundamentals of the company by reviewing its financial statements namely the Income Statement, Balance Sheet and Cash Flows. Financial Statement Analysis can be performed in a structured way using Ratio Analysis. Typically, such financial analysis is done over a series of reporting periods (using the Horizontal Analysis and Vertical Analysis).

Financial Statement Analysis includes comprehensively analyzing the company's liquidity ratios, turnover ratios, profitability ratios, efficiency ratios, dividend ratios, and debt ratios.

You can learn step by step Financial Statement Analysis from the following guide

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Liquidity Ratios

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WHAT YOU'LL LEARN

Liquidity ratio in Financial Analysis provides us with an understanding that whether the company will be able to serve its short-term liabilities (current liabilities) with the help of its short-term assets (current assets). This helps an analyst understand whether the company has enough cash in the system to survive for atleast one operating cycle. Liquidity Ratios include current ratios, quick ratio, cash ratio, defensive interval ratio and working capital ratio.

Turnover Ratios

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WHAT YOU'LL LEARN

This ratio in financial analysis helps us understand the how effectively the firm is utilizing its resources. This ratio effectively tracks the flow of cash from sales activity to receivables, inventory, and payables. Turnover Ratios include the inventory turnover, receivables turnover and payables turnover. Also, you can calculate the cash conversion ratio using the three turnover ratios to find out the length of cash cycle.

Efficiency Ratios

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WHAT YOU'LL LEARN

Efficiency ratios in Financial Analysis measures how effectively the company makes use of its assets relative to its liabilities (equities) for generating sales. Efficiency ratios include the asset turnover ratio, equity turnover ratio, and equity multiplier.

Dividend Ratios

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WHAT YOU'LL LEARN

The company generally shares a part of its profit with its shareholders via dividends in a given period. This share of profit in form of dividends depends on the growth phase of the company. Dividend Ratios capture the relative value of this part using the dividend payout ratio, plowback ratio, and the retention ratio.

Debt Ratios

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WHAT YOU'LL LEARN

This financial statement analysis ratio provides us with an understanding of how much the company is dependent on debt relative to equity. Debt Ratios are of various types including the debt to equity ratio, capital gearing ratio, DSCR Ratio, interest coverage ratio and more.