Analyzing a company's financial statements allows one to find out relevant economic information about it and during a certain period. It is also known as financial statements and includes all the elements that make up the annual accounts, which will indicate its economic value at that time.
It is too risky to embark on a business activity without having forecasts and projections of work, investments and expenses in the medium and long term.
Although a financial statement analysis of a company cannot guarantee the economic success of a company. It does allow having references, expectations and above all, information and data on which to make better decisions.
So the types of methods used by financial statement analysis of a company are diverse and not mutually exclusive. None can be considered exhaustive or perfect. Various modalities give analysts the information they need to understand the financial situation of their organization.
Thus, to obtain good information on the financial situation and the operation of a business, it is required to have a statement of financial position and a statement of results.
It is advisable to prepare the financial statements for the previous year as more different types of Analysis can be used.
1. BY THE KIND OF INFORMATION THAT APPLIES
Vertical Methods: Applied to information referring to a single date or a single period.
Horizontal Methods: Applied to information related to two or more different dates or two or more periods.
Factor analysis: Applied to the distinction and separation of factors that concur in the result of a company.
2. BECAUSE OF THE KIND OF INFORMATION IT HANDLES
Static Methods: When the information on which the analysis method is applied refers to a specific date.
Dynamic Methods: When the information on which the analysis method is applied refers to a given time.
Combined Methods: When the financial statements to which it is applied contain both information at a single date and referring to a given time. Being able to be static-dynamic and dynamic-static.
3. BY THE SOURCE OF INFORMATION BEING COMPARED
Internal Analysis When carried out for administrative purposes, the analyst is in direct contact with the company, having access to all company information sources.
External Analysis When the analyst does not have a direct relationship with the company, and in terms of information, he will be limited to that which is deemed pertinent to obtain to carry out his study. This Analysis is mainly done for credit or equity investment motive.
4. BY THE FREQUENCY OF ITS USE
Traditional Methods: These are those normally used by most financial analysts.
Advanced Methods: They are the mathematical and statistical methods applied in special financial studies or high-level financial Analysis and interpretation.
Also read - Five tips to better manage personal finances.