Before describing individual methods, indicators, and approaches, we will first create a kind of overview page containing all the key terms. Financial analysis is a broad discipline, and this summary will be useful. Here you will find definitions, categories of financial analysis, and links to individual articles that I will gradually prepare.
What Is Financial Analysis and What Is Its Purpose
Financial analysis is a one-time or ongoing methodological process used to evaluate a company, project, or specific activity in order to determine its financial health, profitability, solvency, and overall condition. Financial analysis, or one of its methods, can therefore serve as a source of information for:
- Managerial decision-making – e.g., investments, loans, stock purchases
- Long-term company management – focusing, among other things, on meeting specific performance indicators as business objectives
- Financial covenants – for example, within a bond program or investment project, we may commit as recipients of funds from investors to meet certain financial indicators (covenants), such as maintaining debt levels below “XYZ %”.
- One-time financial analysis – for instance, as part of due diligence (e.g., during a company sale)
- others
In business management, certain indicators can serve as measures and evidence of stable company governance in line with strategic goals.
Sources of Financial Analysis
The main source of financial analysis is undoubtedly the company’s financial statements, or in the case of a project, estimated figures – either in the form of a projected balance sheet and income statement or an investment plan, depreciation plan, and the expected cash flow of the project.
Financial statements as input:
- Statutory Balance Sheet and Income Statement
- Management Income Statement
- Cash Flow Statement
- The Statement of Changes in Equity is often not required
To make the analysis meaningful, annual statements alone are not sufficient; we need approximately five years of historical data. With historical data, we can perform not only vertical analysis but also trend analysis (horizontal analysis). The trend – meaning the direction and pace of improvement – is usually more important than the current state.
Of course, if we are facing an acute liquidity issue, the short-term or current state becomes the priority. Simply put, vertical analysis shows the current position, while horizontal analysis indicates the long-term direction. But I digress.
Additional inputs for financial analysis can include practically anything that helps refine the output — publicly available data such as exchange rates, macroeconomic indicators, bond yields, benchmarks, and so on.
For example, bond yields can help determine the risk-free interest rate, which is then used as an input for calculating various variables (such as the discount rate – WACC, etc.). These variables are then used in further calculations.
Techniques and Methods of Financial Analysis
There are several different methods and techniques for analyzing data. The most common include:
- Vertical analysis – analyzing data vertically (by proportions)
- Horizontal analysis – analyzing data horizontally (by periods or trends)
- Ratio analysis (see below)
- Working capital analysis
- Liquidity analysis
- Debt analysis
- Decomposition of key indicators (e.g., ROE) – pyramid models such as the DuPont analysis
- Various financial models (creditworthiness, bankruptcy, etc.) 1
More advanced methods include, for example:
- Risk analysis – identification and quantification of risks
- Valuation analysis – assessment of projects or companies
- Sensitivity analysis
Financial Analysis Ratios
Below is a list of basic financial ratios commonly used in financial analysis. These are applied through suitable analytical methods and interpreted with consideration of all relevant information (for example, using vertical or trend analysis as discussed in the previous section).
There are different types of indicators. For instance, with difference indicators, we simply add or subtract values to obtain the result – these are straightforward. However, the more interesting category includes ratio indicators. 2
| Basic Indicators of Financial Analysis | Formula |
|---|---|
| Liquidity Ratios (Short-Term Ability to Meet Obligations) | |
| » Current (Overall) Liquidity | Current Assets / Short-Term Liabilities |
| » Quick Liquidity | (Current Assets – Inventory) / Short-Term Liabilities |
| » Cash ratio | Cash and Cash Equivalents / Short-Term Liabilities |
| Profitability Ratios | |
| » ROE - return on equity | Profit / Equity |
| » DuPont Decomposition of ROE | |
| » ROA - return on assets - rentabilita aktiv | Profit / Assets |
| » ROS - return on sales | Profit / Sales |
| » ROC - return on costs | 1 - ROS |
| » EVA - economic value added | NOPAT – (WACC * Capital invested) |
| » ROCE - return on capital employed | Profit / (Assets – Short-Term Liabilities within 1 Year) |
| Activity Ratios – Asset Utilization Ability | |
| » DIO - Days Inventory Outstanding | Average Inventory / (Sales / 360) |
| » DSO - Days Sales Outstanding | Average receivables / (Sales/360) |
| » DPO - Days Payables Outstanding | Průměrné závazky / (Tržby/360) |
| Debt and Financial Structure Ratios | |
| » Total Debt Ratio | Liabilities / Assets |
| » Debt to Equity Ratio (D/E) | Liabilities / Equity |
| » Interest Coverage Ratio | (EBIT) / Interest Expense |
Types of Financial Analysis
In a broader sense, financial analysis can refer to the evaluation of almost anything. To exaggerate slightly – even deciding whether to buy 10 or 15 bread rolls at a store could, in theory, be a financial analysis if we apply analytical reasoning that leads to a better decision. Over time, however, several standard classifications have developed, and many more could be created.
Classification of Financial Analysis Based on Information Availability
a) Internal Financial Analysis
Internal analysis is conducted from within – for example, inside a company or project. This analysis uses all available sources, both public (market quotations, economic indicators) and non-public insider information. These include financial statements, management accounting, budgets, confidential internal data, etc.
Logically, this analysis is more accurate by nature, as it takes into account a wider range of factors than external analysis.
b) External Financial Analysis
This type of analysis is performed using publicly available sources. In some aspects, we may have access to similar types of information as in internal analysis – for example, financial statements. However, these are not current (since statements are published with a delay).
Such analysis also uses data like market quotations, exchange rates, and publicly available macroeconomic indicators. In this case, we are limited because we lack full access to all relevant information, so the results of the analysis must be interpreted with greater caution.
Financial Analysis of Stock Markets
a) Fundamental Analysis
This type of financial analysis is considered external (it typically relies on public information) and is used to evaluate an underlying asset – most often in the context of equity investments. Companies listed on stock exchanges are required to publish financial information quarterly, so relatively recent data is available for analysis. This allows investors to assess a potential investment target’s financial health, growth dynamics, profitability, and various market ratios such as P/E.
However, it is important to remember that markets are efficient, or close to it, and all available and expected information is already reflected in prices. Believing that a one-time financial analysis alone will lead to guaranteed profit because we have found a “hidden gem” is unrealistic – at least in the short term.
Fundamental analysis is a useful tool to form an economic understanding of a company. However, other – often more influential – factors affect stock prices, such as the current macroeconomic situation, exchange rates, commodity prices, or the phase of the economic cycle. The largest market declines often occur during periods of record profitability, when financial analyses look excellent, yet the downturns are caused by external factors (see the 2008 financial crisis, the COVID crisis, etc.).
Conversely, it may be worthwhile to invest in companies with weaker short-term results that can be bought cheaply during a crisis, when most investors are afraid to buy. Such companies must, however, have strong balance sheets, stable business models, sufficient size (too big to fail), and operate in developed markets (not unstable ones like Zimbabwe). In these cases, purchasing during market fear may present good opportunities – though with higher risk. The best opportunities often arise when others are afraid to buy.
b) Technical Analysis
Technical analysis is based on the study of historical price charts. In this case, we focus solely on the chart itself, trying to identify trends or areas of support/resistance using various tools. These are price levels where the price is expected to bounce, based on previous patterns. Technical analysis is available in most trading platforms. You can display a price chart for a financial instrument, overlay it with indicators such as moving averages or standard deviations, and analyze it accordingly.
I plan to write a separate article on technical analysis since I used it extensively in the past during trading. Nowadays, I mainly use fundamental analysis to form an economic view of the macroeconomic situation and a particular company. Once I decide to buy a stock, I use technical analysis to plan the entry or exit point of the trade.
Reference
- Wallstreetmojo.com, Financial Analysis [online]. [cit. 2025-10-29]. Available at: https://www.wallstreetmojo.com/financial-analysis/
- Investopedia, Financial Analysis: Definition, Importance, Types, and Examples [online]. [cit. 2025-10-29]. Available at: https://www.investopedia.com/terms/f/financial-analysis.asp