What types of financial analysis exist?

Financial analysis
Financial analysis

We can classify financial analysis according to the type of information available to carry it out. Thus, for example, we do a vertical analysis when we work with the financial statements of a company of the same year, while a horizontal analysis when we work with financial statements of several years.

Financial analysis can be vertical or horizontal, depending on the objectives of the analysis. The vertical analysis is applied to resolve some doubts related to the financial situation present in the company, on the other hand, when we carry out a horizontal analysis, we want to know its historical behavior.

The financial analysis of a company is a fundamental tool to know its health at an economic and accounting level. Its usefulness is beyond doubt, although it all depends on the type of report that is needed at all times.

There are several types of financial analysis templates that are not mutually exclusive. The different modalities depend on the information that the analyst needs at all times. It is not the same to present a report to a bank to obtain financing than another to detect which activities of the company are the most and least relevant at the cost level.

These are the most important types of financial analysis:

Because of its temporary importance

– Vertical analysis

Also called static analysis, they are used to analyze common financial statements, such as the balance sheet or profit and loss statement. It is used to know the situation of a certain company at a certain moment of time.

At an external level, the vertical analysis is used to know if a company has obtained losses or not, what part of the profit can be distributed among the partners or shareholders and if it is necessary to make a decision regarding its liquidity . But it does not tell us anything about the evolution of the company in recent periods.

– Horizontal analysis

Horizontal or dynamic analyzes are a type of tool used to compare homogeneous financial statements between two consecutive periods. The purpose of this analysis is to determine the variations in all the accounting accounts from one period to another.

It is a type of analysis that at the business level is of great importance, because it determines the evolution and growth of the company, and which items have been the ones that have grown more or less.

– Historical analysis

This type of tool is used to analyze a set of company statuses in two or more different periods. It is a tool used to analyze and detect trends, selecting a year as a base and seeing the evolution of each game.

By the type of information analyzed

– External analysis

They are those carried out by an external analyst with public information sources regarding the company being analyzed. It is a type of analysis that is carried out with a specific purpose: the granting of a loan to the company, for investment purposes or as an audit.

– Internal analysis

Internal analyzes, on the other hand, are those carried out by one or more people who are part of the company. They usually come from a special type of financial statement, internal or management accounting. Its objective is to analyze the main sources of income and expenses and determine which activity or activities perform better or worse and which departments entail costs and benefits for the company.

By the frequency of its use

– Traditional analysis

They are the ones that are used on a regular basis by most financial analysts.

– Advanced analysis

They are mathematical and statistical methods that are applied in special or high-level financial studies and other financial interpretations.

For investment decision making

Fundamental analysis

At the investment level, it is the one that has the most acceptance, especially because it is used to analyze both large and small companies. It is based both on macroeconomic factors (economic growth, sector growth, inflation, fiscal deficit …) and on factors specific to the organization (book value of assets, debt, etc.)

Its main objective is to know if the current price of a share is above or below its real value to know if the company has a bullish or bearish future.

Technical analysis

Technical analysis is based on historical evidence of the price of a stock. It only works in listed companies that have a certain journey on the stock market. In this sense, technical analysts think that all information about a company is collected in the share price.

Its behavior is based, therefore, on this single variable, which will be the important one when investing.

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