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time-series analysis.

Guide to financial statement analysis
The main task of an analyst is to perform an extensive analysis of financial statements. In this free guide, we will break down the most important methods, types, and approaches to financial analysis.

This guide is designed to be useful for both beginners and advanced finance professionals, with the main topics covering: (1) income statement, (2) balance sheet, (3) cash flow, and (4) rates of return.

Analysis of Financial StatementsImage: Example financial analysis template.

1 Income statement analysis

Most analysts start their analysis of financial statements with the income statement. Intuitively, this is usually the first thing we think about with a business… we often ask questions like, “how much revenue does it have, is it profitable, what are the margins like?”

In order to answer these questions, and much more, we will dive into the income statement to get started.

There are two main types of analysis we will perform: vertical analysis and horizontal analysis.

Vertical analysis
With this method of analysis of financial statements, we will look up and down the income statement (hence, “vertical” analysis) to see how every line item compares to revenue, as a percentage.

For example, in the income statement shown below, we have the total dollar amounts and the percentages, which make up the vertical analysis.

vertical analysis

As you see in the above example, we do a thorough analysis of the income statement by seeing each line item as a proportion of revenue.

The key metrics we look at are:

Cost of Goods Sold (COGS) as a percent of revenue
Gross profit as a percent of revenue
Depreciation as a percent of revenue
Selling General & Administrative (SG&A) as a percent of revenue
Interest as a percent of revenue
Earnings Before Tax (EBT) as a percent of revenue
Tax as a percent of revenue
Net earnings as a percent of revenue