Techniques of Financial

Statement Analysis
 Traditional Techniques of Financial Statement Analysis
o Horizontal analysis
o Vertical analysis
o Ratio analysis:
I. Liquidity
II. Profitability
III. Efficiency
IV. Solvency
V. Market
VI. Cash Flow
VII. Du Pont Framework
• Horizontal analysis is used in financial
statement analysis to compare historical data,
over a number of accounting periods.
Horizontal analysis looks at the trend of
financial statements over multiple periods,
using a specified base period. The statements
for two or more periods are used in horizontal
analysis.
Horizontal analysis typically shows the changes
from the base period in dollar and percentage.
Horizontal Analysis Formula:

Horizontal Analysis formula = [(Amount in

comparison year – Amount in the base year)/
Amount in a base year]  x 100
Horizontal Analysis can be done for any
statement like balance sheet, income
statement, statement of cash flows.
Vertical analysis is a method of financial
statement analysis technique in which each
line item is listed as a percentage of a base
figure within the statement.
This method compares different items to a
single item in the same accounting period. The
financial statements prepared by using this
technique are known as common size financial
statements.
 The vertical analysis of a balance sheet results
in every balance sheet amount being restated
as a percent of total assets.
 The vertical analysis of an income
statement results in every income statement
amount being restated as a percent of  sales.
 vertical analysis of a cash flow statement
shows each cash inflow or outflow as a
percentage of the total cash inflows.
 DuPont Analysis
• DuPont analysis is a technique which can be
used to decompose ROE into its constituent
parts. This decomposition is used to evaluate
the component parts of a company's return on
equity (ROE). This allows an investor to
determine what financial activities are
contributing the most to the changes in ROE
 Three Component DuPont Analysis

ROE = (Net income / Revenue) * (Revenue /

Average total assets) * (Average total assets /
Average shareholders’ equity).

o Net profit margin measures operating efficiency

o Asset turnover shows asset utilization efficiency
o Equity multiplier shows financial leverage
 
 Five Component DuPont Analysis
ROE = (Net income / EBT) * (EBT / EBIT) * (EBIT / Revenue)
* (Revenue / Average total assets) *(Average total assets
/ Average shareholders’ equity)
o Tax burden is the proportion of profits retained after
paying taxes
o Interest burden shows how interest is affecting profits. If
a company has no debt, the ratio will be 1. 
o Operating income margin is the operating income per
dollar of sales 
o Asset turnover shows asset utilization efficiency
o Equity multiplier shows financial leverage