Three Essential Techniques for Analyzing Company's Financial Information

Analyzing Dollar and Percentage Changes on Statements

Dollar and percentage changes on financial statements involve assessing how specific line items, such as revenue, expenses, or net income, have changed over a given period in absolute terms (dollar changes) and relative to the base amount (percentage changes). By examining these changes, analysts can identify trends, patterns, and potential areas of concern or improvement within the company's financial performance.

Utilizing Common-Size Statements

Common-size statements express financial data as a percentage of a specific base amount. For example, each line item on the income statement may be presented as a percentage of total revenue, while assets and liabilities on the balance sheet may be expressed as a percentage of total assets or total liabilities. This technique enables analysts to compare the composition of different companies' financial statements and detect any variations or anomalies.

Calculating Financial Ratios

Financial ratios offer valuable insights into a company's financial health, profitability, liquidity, efficiency, and other key aspects. Ratios such as the current ratio, return on equity (ROE), debt-to-equity ratio, and gross profit margin allow analysts to compare a company's performance with industry benchmarks, historical data, or competitors. These ratios provide a standardized method for evaluating a company's financial position and performance, making them indispensable tools for financial analysis.