Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Change in Net Working Capital (NWC) Formula
- Cash Flow from Operations Ratio
- Cash Flow Per Share
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Days Sales Uncollected
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Overcapitalization
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula

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## Tools of Financial Analysis

Financial Analysis tools are medium that helps in understanding the financial situation of the company or for decision making with respect to investment in a business or a project. Such tools can be developed based on the requirement and can be utilized for deriving the required information.

When an analyst, business executive, or student is dealing with a financial issue or wishes to understand the financial implications and economic trade-offs involved in decisions about business investment, operations, or financing, a wide variety of analytical techniques—and sometimes rules of thumb—is available to generate quantitative answers. To choose the appropriate tools from the available alternatives is clearly an important aspect of the analytical task.

Top 4 Most common financial analysis tools are –

- Common Size Statement
- Comparative Financial Statements
- Ratio Analysis
- Benchmarking Analysis

Let us discuss each tool one by one in detail

### Top 4 Financial Analysis Tools

Let’s evaluate different tools used for analysis:

#### #1 – Common Size Statements

This is the first financial analysis tool. In the market, companies of different size and structures are available. In order to make them comparable, their financial statement must be prepared in absolute format, which brings all the particulars at one level. The globally acceptable format to disclose the financials for comparison is to bring in data in a percentage format. The organization will prepare main financial statements like Common size Balance sheet, Common size Income statement and Common Size Cash flow statement.

For example, in balance sheet- base of total asset, in income statement- base of net sales and in cash flow statement – base of total cash flows can be taken and all the line items will be disclosed in percentage form, which can be adequately used for doing internal analysis or for doing external analysis with peers group.

#### #2 – Comparative Financial Statement

Comparative financial statements are used in horizontal analysis or trend analysis. It helps in analyzing the periodic change in various components of the financial statements and displays which component has the maximum impact.

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Such comparative financial statements can be either prepared in currency amount terms or in percentage terms.

Thus from the above one can easily compare the periodic data either in numeric format or in percentage terms.

The comparative financial statement has advantages like easy comparability, observing the trend, periodic performance evaluation, etc. However, it has disadvantages like ignoring inflationary impact, high dependability on financial information, which can be manipulated, a different method of accounting used by different entities, etc.

#### #3 – Ratio Analysis

Ratio Analysis is the most commonly used financial analysis tool used in the market by an analyst, experts, internal Financial Planning & Analysis department and other stakeholders. Ratio Analysis has various kinds of ratios, which can help in commenting on

- Profitability Ratio Analysis
- Rate of Return Analysis
- Solvency Ratios
- Liquidity
- Coverage of Interest or any cost
- Comparing any component with turnover

Moreover, an entity based on their requirement can prepare the ratios for their analysis and try to manage the operations.

However, below are the odd side of ratio analysis:

- Highly relying on past information
- Inflation impact is ignored
- Chances of manipulation/window dressing of financials, which can enhance the fairness of ratios
- Any seasonal changes, based on the nature of business will be ignored, as it cannot be directly adjusted in financials

Learn more from these Top 28 Financial Ratios with Formulas

#### #4 – Benchmarking

Benchmarking is the process of comparing the actuals with the targets set out by the top management. Benchmarking also refers to the comparison made with the best practices and strive to achieve the same keeping the same as the target. In benchmarking below steps are to be performed:

**Step1:**Select the area which is needed to be optimized.**Step2:**Identify the trigger points with which it can be compared.**Step3:**Try to set up the better standard for the same or take industrial standards as the benchmark.**Step4:**Evaluate the periodic performance and measure the trigger points.**Step5:**Check whether the same is achieved or not, if not do variance analysis.**Step6:**If achieved, then strive to set up the better benchmark.

For doing the above benchmarking, ratios, operating margin matrix, etc can be used. Operating margin of industry average can be compared and should try to arrive at the better position. The company named Xerox, in order to sustain in the photocopy business, initiated Benchmarking. Presently, they have optimized more than 100 functions in comparison to industrial standards. Benchmarking can be observed as a tool for improvement with the aim of customer-focused improvement activities and should be driven by customer and internal organization needs. Benchmarking is the practice of being humble enough to admit that someone else is better at something and wise enough to learn how to match and even surpass them.

### Conclusion

There are numerous tools available in the market to carry out the financial analysis based on the various needs. In addition, organizations based on their need, also build up various in-house tools, which help them to track their requirements. In today’s competitive world, it is of utmost importance to track the performance of own organization, as well as of the competitor as it will help in maintaining the performance and help in thriving the business.

### Recommended Articles

This has been a guide to Financial Analysis Tools. Here we discuss the top 4 financial analysis tools including common size, comparative statements, ratio analysis and benchmarking along with examples. You may learn more about Financial Statement Analysis from the following articles –