7 Types of Financial Analysis (With Definition and Examples)
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1. Vertical 1. VerticalIn vertical financial analysis, the relationship between various items on a financial statement is analyzed. For example, during one accounting period, one item is measured against another item that's considered the base and the relationship is expressed as a percentage. Though it only accounts for one time period, it can help you recognize any changes over time and compare various entities.2. Horizontal 2. HorizontalHorizontal analysis refers to the evaluation of how financial statement figures change over a period of time. In other words, it compares one item to another in a different time period. Because of this, it can help analyze a business' finances from one year to the next. Horizontal analysis is also known as dynamic analysis or trend analysis, the latter being because this form of analysis can be useful in spotting trends over time.3. Liquidity 3. LiquidityLiquidity analysis uses ratios to determine whether or not a company will be able to pay back any debts or other expenses. This type of analysis is helpful because if a business isn't able to pay off any liabilities, they're bound to face financial troubles in the near future. Liquidity analysis is particularly helpful for lenders or creditors who want some insight into your financial standing before offering you a loan or credit. Various ratios such as the cash ratio and current ratio are used in a liquidity analysis.4. Profitability 4. ProfitabilityIn a profitability analysis, a company's rate of return is evaluated. Every business wants to be profitable, therefore, using the profitability analysis to measure its cost and revenue in a given period can be highly beneficial for them. If a company's revenue outweighs its costs, it's considered profitable. Profitability ratios—both margin and return ratios—are used in this type of analysis. These types of ratios include the following:Margin ratios: Gross profit margin, operating profit margin, net profit margin, cash flow marginReturn ratios: Return on Investment (or Assets), return on equity, cash return on assets5. Scenario and Sensitivity 5. Scenario and SensitivityDuring this type of analysis, an investment's value is measured based on current scenarios and changes. For example, it analyzes how variable A is affected based on changes and sensitivities in other variables such as variable B or C. Scenario and sensitivity analysis can even help analysts predict certain outcomes based on different variables. They do so by studying the various variable effects based on prior data and then making informed decisions based on their findings.6. Variance 6. VarianceVariance analysis refers to the process of analyzing any differences between a business's budget and the actual amount it spent. For example, if you budgeted your sales to be $1,000 but you actually sold $250, the variance analysis would conclude with a difference of $750. Once you know this, you can start to determine the cause for the variance and implement strategies for avoiding any negative variances in the future. Variance analysis encompasses various types of variances including purchase price variance, labor rate variance, fixed overhead spending variance and material yield variance.7. Valuation 7. ValuationThrough the valuation financial analysis, your business's present value is evaluated. This type of analysis can be utilized for various instances including mergers and acquisitions or taxable events. There are different types of valuation ratios including price/earnings and price sales. Once you determine your company's ratios, you can begin to compare them to your company's past ratios, your competitor's ratios or your particular industry at large.Related: Examples of financial analysisHere are three examples of financial analysis at work:10 Tips For Improving Your Career 10 Tips For Improving Your Career.css-k1socg{border-radius:0.25rem;color:#2557a7;font-family:"Helvetica Neue","Helvetica","Arial","Liberation Sans","Roboto","Noto",sans-serif;-webkit-text-decoration:underline;text-decoration:underline;-webkit-transition:color 200ms cubic-bezier(0.645,0.045,0.355,1),box-shadow 200ms cubic-bezier(0.645,0.045,0.355,1);transition:color 200ms cubic-bezier(0.645,0.045,0.355,1),box-shadow 200ms cubic-bezier(0.645,0.045,0.355,1);display:-webkit-inline-box;display:-webkit-inline-flex;display:-ms-inline-flexbox;display:inline-flex;-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;-webkit-text-decoration:solid underline;text-decoration:solid underline;color:#2557a7;}.css-k1socg:hover{color:#164081;}.css-k1socg:active{color:#0d2d5e;}.css-k1socg:focus{outline:none;box-shadow:0 0 0 1px #2557a7;}.css-k1socg:focus:not([data-focus-visible-added]){outline:none;box-shadow:none;}.css-ojgt6l{margin:0;margin-bottom:0.5rem;color:#2d2d2d;font-weight:700;font-family:"Helvetica Neue","Helvetica","Arial","Liberation Sans","Roboto","Noto",sans-serif;font-size:1rem;line-height:1.5;color:#2557a7;}
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