The tools of analysis

There are five main tools of financial analysis. Pick the one that fits the question.

• Comparative statements: two (or more) years' figures side by side, with the changes. Also called horizontal analysis.
• Common size statements: each item as a percentage of a common base (total revenue, or total assets). Also called vertical analysis.
• Trend analysis: each year's figure as a percentage of a base year, over several years, to show the direction of change.
• Ratio analysis: the relationship between two items, to judge profitability, solvency, liquidity and efficiency.
• Cash flow analysis: the actual cash that came in and went out; the cash flow statement explains why the cash balance changed.

A simple way to remember the first two: across the years is horizontal; within one year is vertical.

Common size statements are the right tool to compare a small and a big company: percentages remove the difference in size.