What Is Financial Analysis?

Financial analysis is the process of evaluating a business’ performance by collecting and analyzing data.

Written by Matthew Urwin
Published on Dec. 16, 2021
What Is Financial Analysis?
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Kristen Pascoe | Aug 11, 2022

With insights into past trends, financial analysts can predict how a company’s financial health may behave in the future and make recommendations. Many analysts rely on Microsoft Excel to organize data into spreadsheets, but the rise of AI trading technology is streamlining financial analyses.

What are the types of financial analysis?

If analysts want to measure a company’s growth over multiple years, a horizontal analysis gets the job done. However, professionals may prefer a vertical analysis (an analysis in which each line item is listed as a base figure's percentage within the statement) if they want to rely on income statement factors and revenue when evaluating a company’s financial development. 

Analysts can also look at the size of an organization’s market share, year-over-year growth and other traits to get a clearer financial picture. It’s important to keep in mind that financial analyses follow trends in data. With more companies securing data from alternative sources, financial analysis may take on new forms soon.

Why is financial analysis important?

  • Diagnosing the financial health of a business helps people inside and outside the organization make more informed decisions.

To determine the next steps for a company, leaders need to center their decisions around various financial data points. Understanding where expenses lie and the amount of available funds enables finance managers to allocate resources more efficiently. As a result, finance teams rely on this information to develop thoughtful strategies.  

Many outside parties also have a strong interest in a company’s financial performance. For startups, investors need to feel confident about taking chances while for larger corporations, labor unions may want to review statements to decide how much of a pay increase is appropriate. With these different groups relying on financial information, it’s become even more imperative for businesses to leverage the presence of big data to offer financial transparency.


How can I improve my financial analytical skills?

Financial analysis is an evolving field, so professionals should take extra steps to stay sharp and stand out from the talent pool.

Technology has become intertwined with the financial landscape, requiring analysts to broaden their capabilities. Aspiring financial analysts can become more tech-savvy by exploring Python and other must-know programming languages. In addition, beginners can apply what they’ve learned by playing around with free data sets.  

Besides taking online courses and performing common tasks, individuals can get more creative with their curricula. Problem-solving is a key component of financial analysis, so puzzles and logic games like chess are excellent ways to fortify one’s analytical mindset. By combining the right amount of online and in-person activities, rising financial analysts can diversify their backgrounds before pursuing an internship or entry-level opportunity.

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