Methods of financial analysis


How to analyze the company’s performance to plan?

Financial analysis methods make it possible to analyze resource usage, capital adequacy, profit resources and assess the bankruptcy risk. It is the financial analysis that will answer the question: are we doing everything right in terms of financial performance? Are our results in line with plans, and what to do if they are not? After all, the goal of any business is to make a profit, and for a healthy business, the desire for high profitability is quite a natural thing. the business owner should understand whether we have taken everything into account, have not gone too far, have not become highly leveraged, and what kind of rainy-day fund we have.

Without a regular performance assessment, the company will fly blind, not understanding which line of business brings more profit, if there is revenue growth, whether the investment pays off, what resources are required, and whether the company is able to meet its obligations.

How is financial performance analyzed?

Analysts and economists use financial analysis methods, which, in a holistic way and individually, help to create a clear picture of the state of business. Data sources are the balance sheet, profit and loss statement, statement of changes in equity, and other company reports. Analytical tables are compiled, and graphs and charts are drawn for clarity.

Vertical structural analysis

It consists of determining the percentage in the total figure of the item. So, in the balance sheet structure, the balance sheet total is 100%, and each line item (separately for Asset and Liabilities) is shown as a certain percentage of it. In other words, vertical analysis allows you to determine the share of elements in the whole:

  • in the balance sheet — the ratio of non-current and current assets, debt-to-equity ratio, and capital structure;
  • in the structure of revenue or sales, the largest percentage of the product type that brings the greatest revenue is examined ;
  • in the cost structure — which cost items have the largest percentages.

, you can drill down any balance sheet item to analyze its structure, thereby revealing the initial problems. For example, more than 10-20 percent of one large counterparty in the structure of receivables indicates a low diversification of the product portfolio and, in case of default by such a debtor behind the payment deadline, can lead to at least large cash gaps.

Horizontal (dynamic) analysis

It is used to identify changes in indicators for a certain period, both in absolute values and as a percentage. This method determines:

growth rate: 100%* Absolute change/Base value;

It answers the question of how much revenue has grown compared to last year, whether costs have decreased or increased, whether profits have risen, and whether losses have reduced. The time period may be different, but, as a rule, the dynamics of the main financial indicators are monitored on a quarterly basis, and the growth is compared with the growth of the indicator for the same period of the previous year. One should pay close attention  to sharp spikes and declines. For example, a large increase in payables could be a reason to pay attention to the company’s leverage, and an assessment of these changes follows.

An example of horizontal and vertical analysis is shown in the table.

Analysis of the aggregated balance sheet in the Finoko 

balance sheet example in Finoko app

Comparative analysis

Comparative and horizontal methods of financial analysis are related and similar. the comparison is based on a horizontal method. In addition to making a comparison of certain periods, the values are compared with the following:

  • with average industry values;
  • with established standards (limits, ranges) and optimal values;
  • with the performance of competitors for the same period or with the best company in the industry;
  • target to actual;
  • with the base period (for example, with the best year in terms of profit and profitability or the previous period (year, quarter, month));
  • with intercompany indicators (for example, between branches);
  • before and after any event or change, etc.

Comparative analysis allows you to identify something specific or, on the contrary, identical in the phenomena under study. When analyzing, the homogeneity of the compared values is a must, that is, the time intervals, calculation methods, and conditions for the processes under study (for example, the same climatic conditions, similar technologies, etc.) should be comparable.

Integral (factor) method

It is the most mathematical method of financial analysis, as it implies more calculations than other methods. It answers the questions: what led to the indicator change, what factors and in what amount influenced the change in the value. Thanks to computer technology, this analysis has ceased to be time-consuming, and now it is available to any company. Both two-factor and multi-factor models are used. The integral method is considered more accurate than other factor analysis methods.

A little bit of science: the essence of the method is the summation of the increments of a function defined as a partial derivative multiplied by the increment of the argument over infinitely small intervals.

So, due to the increase in price, revenue increased by 6,420 thousand euro, however, it was possible to sell a smaller amount of goods compared to the base period, which led to a “shortfall” of revenue by 2,880 thousand euro.

Trend analysis

One of the simplest ways to forecast is to establish a trend over several reporting periods. The time series is analyzed, and the conclusion of what trend is coming up in the future is drawn. If a given trend is analyzed by years, then the data for at least 5 years is used. Changes in each balance sheet item are calculated compared to the previous period; the figures are “cleaned” from random influences and specific characteristics of individual periods, and then, based on the current trend, future values are predicted. So, if the growth rate of income (sales revenue) tends to decrease, this may indicate a company’s reduction in economic activity or low competitiveness, which, without making management decisions, can lead to a critical state.

Ratio analysis

The profitability of the business does not always indicate the efficiency of the company and the absence of negative trends. Indeed, absolute values can be “beautiful”, however, we need to understand what resources are used to achieve this profit, and what can affect the deterioration of financial stability.

Financial ratios are relative values calculated on the basis of financial reporting data, and they determine how these data correlate. Various aspects of financial and economic activity are assessed: solvency, efficiency, financial independence, business activity, etc.

Each company calculates the ratios according to the special aspects of its business, but we will give generally applied ratios for all types of business.

Liquidity ratios 

The values measure the company’s ability to pay off its current liabilities (CL): 

  • quick liquidity – due to highly liquid current assets: (CA-Inventory)/CL;
  • current liquidity – due to current assets: CA/CL;
  • absolute liquidity – due to available cash (C) and short-term investments (STI): (C+ STI)/CL.


It is the ratio of profit to any indicator, which shows efficiency, profitability, and return:

  • return on assets — net profit/company’s assets — shows how efficiently the company uses its assets;
  • return on equity — net profit/equity — shows the return on each invested euro;
  • return on sales — operating profit/revenue — reflects how much profit is being produced per earned euro the profit margin for each industry is different, but the higher the ratio, the more efficiently the company controls its costs and wisely builds a pricing strategy.

Methods of financial analysis: conclusions

Two or more methods are used more often to get better results. These are vertical (structural) and horizontal (dynamic) analyses, and also these types of financial analysis are the basis for other methods. However, you should not rely solely on them. Use a combination of methods to get a complete picture, and comprehensively assess/measure the financial state and business development opportunities.

Which type of analysis to choose depends on the objectives of the study, evaluation functions, and factors identified during the analysis by one of the methods.

The company is a living and breathing organism, all processes are interconnected, so the analysis should be based on the aggregate values and their correlations. Comprehensive financial analysis not only shows poor, average and good financial states but also reveals the factors that influenced this. Focus on the right indicators and track them in dynamics, using various methods. Use the Finoko system to analyze the target and actual results of work — a convenient analysis tool that will help you cope with the high level of uncertainty in modern business.

Finoko soft systems

Web based solution and mobile application for management accounting, budgeting, corporate performance management, cash flow management and KPI dash boards.


Sign up to receive the latest news and trends from our company.

More questions? Get in touch