Editing Financial analysis (section)

== Techniques==
Financial analysts often compare [[financial ratios]] (of [[solvency]], [[Profit (accounting)|profitability]], growth, etc.):

* '''Past Performance''' - Across historical time periods for the same firm (the last 5 years for example),
* '''Future Performance''' - Using historical figures and certain mathematical and statistical techniques, including present and future values, This [[Extrapolation|extrapolation method]] is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.
* '''Comparative Performance''' - Comparison between similar firms
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These ratios are calculated by dividing a (group of) account balance(s), taken from the [[balance sheet]] and/or the [[income statement]], by another, for example :

:''[[Net income]] / equity = [[return on equity]] (ROE)

:''[[Net income]] / total assets = [[return on assets]] (ROA)

:''Stock price / earnings per share = [[P/E ratio]]
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Comparing financial ratios is merely one way of conducting financial analysis. 
Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amount.<ref>Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). ''Intermediate Accounting'' (12th ed.). Hoboken, NJ: John Wiley & Sons, p. 1320 {{ISBN|0-471-74955-9}}</ref>  For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over a given time period expressed as a percentage is known as horizontal analysis.<ref>Kieso, et al., 2007, p. 1320</ref>

Vertical or common-size analysis reduces all items on a statement to a "common size" as a percentage of some base value which assists in comparability with other companies of different sizes.<ref>Kieso, et al., 2007, p. 1320</ref> As a result, all Income Statement items are divided by Sales, and all Balance Sheet items are divided by Total Assets.<ref>Ehrhardt, M., Brigham, E. (2008). ''Corporate Finance: A Focused Approach'' (3rd ed.). p. 131 {{ISBN|978-0-324-65568-1}}</ref>

Another method is comparative analysis. This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.<ref>Kieso, et al., 2007, p. 1319</ref>