Types Of Financial Performance Analysis

Financial performance analysis can be classified into different categories on the basis of material used
and modes operandi as under:
A. Material used: On the basis of material used financial performance can be analyzed in following
two ways:
1. E xternal analysis
This analysis is undertaken by the outsiders of the business namely investors, credit agencies,
government agencies, and other creditors who have no access to the internal records of
the company. They mainly use published financial statements for the analysis and as it serves
limited purposes.
2. Internal analysis
This analysis is undertaken by the persons namely executives and employees of the
organization or by the officers appointed by government or court who have access to the
books of account and other information related to the business.
B. Modus operandi: On the basis of modus operandi financial performance can be analyze in the
following two ways:
1. Horizontal Analysis
In this type of analysis financial statements for a number of years are reviewed and analyzed.
The current year’s figures are compared with the standard or base year and changes are
shown usually in the form of percentage. This analysis helps the management to have an
insight into levels and areas of strength and weaknesses. This analysis is also called Dynamic
Analysis as it based on data from various years.
2. Vertical Analysis
In this type of Analysis study is made of quantitative relationship of the various items of financial
statements on a particular date. This analysis is useful in comparing the performance of
several companies in the same group, or divisions or departments in the same company. This
analysis is not much helpful in proper analysis of firm’s financial position because it depends
on the data for one period. This analysis is also called Static Analysis as it based on data from
one date or for one accounting period.