Have you ever looked at a financial report and felt lost in numbers? Many finance professionals and CFA aspirants struggle to actually understand what the data means beyond the surface.
You might wonder:
· How do experts make quick decisions from a balance sheet?
· Why do your financial forecasts often go wrong despite hours of analysis?
· Are you relying too much on one type of ratio?
These are common frustrations when trying to interpret financial data. The real issue?
Not knowing the right techniques of financial statement analysis. It’s not just about reading numbers; it’s about connecting them to business realities.
This post will help you know the tools and techniques of financial statement analysis used by experienced analysts and those preparing for the CFA course.
What Is Financial Statement Analysis?
Financial statement analysis means reading financial documents like the balance sheet, income statement, & cash flow statement in a way that reveals the financial health of a company.
Financial statement analysis means reviewing and analysing a company’s financial statements to make informed economic decisions that can help generate income in the future.
But just reading isn’t enough.
You need to analyse using frameworks such as horizontal analysis, vertical analysis, ratio analysis, and benchmarking. These methods help you detect issues like falling profits or hidden debts early on.
And if you’re a CFA candidate, mastering this is non-negotiable.
Why You Shouldn’t Rely on Just One Technique?
Many beginners make the mistake of relying on one or two ratios. That’s risky.
Financial statement analysis involves thoroughly examining a company’s financial statements, including the income statement & cash flow statement.
For example, looking at the current ratio alone won’t tell you if a company is overspending or undersaving. But when you combine it with asset turnover and return on equity (ROE), you start seeing the full picture.
This is where techniques of financial statement analysis come into play, using a combination of tools and techniques of financial statement analysis makes your evaluation stronger and more accurate.
Most Trusted Techniques
Let’s break down the core methods:
1. Horizontal Analysis
Compare financial performance across different periods. It helps to identify growth trends or decline patterns.
2. Vertical Analysis
Look at one period’s financial statement and convert every line item into a percentage of a base figure. It shows internal efficiency.
3. Ratio Analysis
This is the most used tool. Key types:
- Liquidity Ratios (e.g., current ratio, quick ratio)
- Profitability Ratios (e.g., ROE, ROA)
- Leverage Ratios (e.g., debt-to-equity)
4. Cash Flow Analysis
Analyse operational, investing, and financing activities. Very useful for understanding cash burn or generation capacity.
5. Industry Benchmarking
Compare with competitors to understand where the company stands.
This is the essence of the tools and techniques used in financial statement analysis, not just individual numbers but combining them to form a story.
Comparative View of Techniques
| Technique | What It Does | Ideal For |
| Horizontal Analysis | Tracks performance over time | Trendspotting |
| Vertical Analysis | Breaks down structure in % | Year-specific snapshots |
| Ratio Analysis | Calculates the relationship between data | Detailed diagnostics |
| Cash Flow Analysis | Checks cash movement | Liquidity study |
| Benchmarking | Compared with others in the industry | Competitive positioning |
These are the most used techniques of financial statement analysis in professional practice.
Where Most Analysts Go Wrong
Here’s the problem. Many finance professionals:
- Focus only on ratios.
- Ignore market context or qualitative factors.
- Misinterpret numbers without industry comparisons.
The result? Inaccurate conclusions and poor decisions.
If you’re preparing for a CFA course, this could make or break your exam results or interviews. Instead, follow an integrated approach where you explain the techniques of financial statement analysis using both internal company data and external factors like industry or economy.
Use it as a checklist next time you analyse a report.
- Collection
- Review
- Ratio Calculation
- Benchmarking
- Interpretation
How CFA Professionals Apply These Techniques in Real Life
CFA charterholders and investment analysts use these techniques daily. From evaluating IPOs to advising M&A deals, they combine multiple methods in one structured analysis.
For example:
- A CFA working in equity research might first use horizontal analysis to see revenue growth.
- Then, they apply ratio analysis to evaluate margins and returns.
- Finally, they compare these numbers with peer companies.
This real-world application is why tools and techniques of financial statement analysis are central to the CFA course curriculum.
How Imarticus Learning Helps You Learn Financial Analysis Faster
Imarticus Learning designed its CFA programme with all these techniques in mind. Through real-time support, dual-teacher sessions, Kaplan Schweser resources, and placement support, you’re not just studying; you’re getting job-ready.
If you’re stuck understanding how to explain the techniques of financial statement analysis, the right mentor can change everything. That’s exactly what this course provides.
The CFA course by Imarticus Learning brings live online sessions, dual-teacher support, real-time doubt-clearing, and Kaplan Schweser content. What sets it apart?
A money-back guarantee if you don’t clear the CFA exam and dedicated placement assistance after clearing Level 1. Whether you aim to become a portfolio manager or an equity analyst, this course gives you the right foundation and direction.
Join the Chartered Financial Analyst course at Imarticus Learning and transform your future.
FAQs
- What are the main techniques used in financial statement analysis?
They include horizontal analysis, vertical analysis, ratio analysis, benchmarking, and cash flow analysis.
- How can I explain the techniques of financial statement analysis simply?
These are methods used to interpret financial data to assess a company’s performance and financial position.
- Which is the most used technique in financial statement analysis?
Ratio analysis is most commonly used, especially by CFA professionals.
- Can I learn these techniques in a CFA course at Imarticus Learning?
Yes. Imarticus Learning’s CFA programme covers these in depth with practical examples.
- How do financial analysts use these techniques in their jobs?
They evaluate company performance, project future earnings, and advise on investments.
- What’s the difference between the tools and techniques used in financial statement analysis?
Tools refer to specific formulas (like ratios), while techniques refer to the broader method of applying them.
Conclusion
Financial data isn’t scary. It just needs the right lens. Use the tools and techniques of financial statement analysis explained here to decode reports faster and with more confidence.
And if you want to make a serious career out of it, consider the CFA course at Imarticus Learning. You’ll get mentorship, structure, placement help, and global certification all in one.
Your next financial breakthrough starts with one decision. Take the CFA course with Imarticus Learning today!