Tools for Analyzing a Company’s Financial Position

Horizontal Tool

Horizontal analysis is whereby a financial analyst takes into consideration organization growth within a given period of time. It contributes to placing the organization into the perspective on whether the venture is yielding results in relation to the timeframe (Rich, 2010). The horizontal method takes up the financial trend of a company by considering multiple timings but specifying a significant base period. One of the considerations that this method applies is keeping track on the changes of the value of the dollar within the timeline (Kalmárová, 2012). A percentage is derived from the base year and the dollar change in order to use if for the calculations of the organization’s growth. One of the ways this method is necessary for decision making is through comparing the organization’s growth to its competitors in order to determine whether it is performing well or poorly.

Vertical Analysis

Vertical analysis contributes to listing products separately in order to determine which items are more productive in returns to the organization than the others. The tool is relevant in establishing comparison process of different items and can be useful in analyzing companies that are different in size (Rich, 2010). Percentages are derived in relation to the comparison of the returns on sales and the costs incurred in production to determine the benefit of the product or service to the organization. The tool is very resourceful in determining the profit margin of various products in order to determine whether the organization should invest in them or declare them invalid ventures (Kalmárová, 2012).

Ratio Analysis

Ratio analysis tool contributes to the evaluation of the performance of the organization on how it is financially healthy. It considers the historical financial statements and compares them with the current ones to bring about a conclusive evaluation. The procedure to be followed in carrying out this method relates to the kind of ratio to be carried out. It can either be liquidity, profitability, solvency, efficiency, coverage or market prospect ratios. The method can be used to make decisions that are to boost the improvement of the organization or those that are to cap chances of its deterioration (Rich, 2010).

In all these tools, financial analysts use company’s financial information that is necessary in preparing balance sheets. It means that no financial report can be prepared without analyzing the input in finance and financial returns in a venture.

References

Kalmárová, Z. (2012). Sainsbury’s vs. Morrisons – An Investment Decision Based on Financial Analysis. Financial Assets and Investing, 3(3), 17-28.

Rich, J. (2010). Cornerstones of financial accounting: current trends update. Australia Mason, Ohio: South-Western, Cengage Learning.