8.3 Techniques of financial Statement analysis; Cross-Sectional analysis, Time series analysis and a combination of both techniques.

Financial statement analysis involves the examination and interpretation of financial statements to assess the financial health, performance, and prospects of a company. Various techniques can be employed to conduct financial statement analysis, including:

1. Cross-Sectional Analysis: This technique involves comparing the financial performance and ratios of a company with its industry peers or competitors at a specific point in time. It helps identify relative strengths and weaknesses and provides insights into how the company performs in comparison to its industry counterparts.
2. Time Series Analysis: Time series analysis involves analyzing the financial statements of a company over a period of time to identify trends, patterns, and changes in financial performance. It helps assess the company’s historical performance, growth rates, and financial stability.
3. Trend Analysis: Trend analysis involves examining the changes in financial statement items over multiple periods to identify patterns or trends. It helps assess the company’s growth or decline in key financial metrics such as revenue, expenses, profit margins, and ratios.
4. Ratio Analysis: Ratio analysis involves calculating and analyzing various financial ratios derived from the company’s financial statements. Ratios provide insights into the company’s liquidity, solvency, profitability, efficiency, and market valuation. Commonly used ratios include liquidity ratios, profitability ratios, efficiency ratios, and leverage ratios.
5. Common Size Analysis: Common size analysis involves expressing financial statement items as a percentage of a base figure, typically sales or total assets. It helps in comparing the relative composition and structure of different components within the financial statements. Common size analysis facilitates the identification of trends and changes in the company’s financial structure and performance.
6. DuPont Analysis: DuPont analysis decomposes return on equity (ROE) into its component parts, such as profit margin, asset turnover, and financial leverage. It helps understand the sources of a company’s profitability and how efficiently it utilizes its assets and equity.
7. Combined Analysis: Combining cross-sectional and time series analysis techniques provides a comprehensive view of a company’s financial performance and position. This approach involves comparing the company’s financial ratios with its industry peers over multiple periods to assess both relative and historical performance.

By using a combination of these techniques, financial analysts and investors can gain a deeper understanding of a company’s financial performance, identify trends and patterns, assess its strengths and weaknesses, and make informed investment or business decisions.