Tools of Financial Statement Analysis

A number of established techniques ('tools') are used to analyse financial statements, each highlighting a different aspect of a company's performance and position:

• Comparative Statements — show corresponding figures of two or more accounting periods (or two firms) side by side, along with the absolute and percentage change, revealing the direction and pace of change (Section 3).
• Common-Size Statements — express each item of a financial statement as a percentage of a chosen common base (Revenue from Operations for the Statement of Profit and Loss; Total Assets or Total Equity and Liabilities for the Balance Sheet), revealing the internal structure of the statement regardless of the firm's absolute size (Section 4).
• Trend Analysis (Trend Percentages) — expresses figures for a series of years as a percentage of a chosen base year, revealing the long-term direction of movement over several years, rather than just a two-period comparison (Section 5).
• Ratio Analysis — expresses the relationship between two related figures as a ratio (e.g. Current Ratio, Net Profit Ratio), studied in depth in the next chapter of this unit. …