Financial Analysis Made Simple – How to Read the Numbers and Draw the Right Conclusions

Financial statements are not merely a collection of figures prepared for accountants, authorities or banks. For a business owner or manager, they are first and foremost a source of information about what is happening within the company, where the business is heading and why its results are changing.

 

Simply looking at revenue or profit is not enough. It is far more important to ask a sequence of questions: What has changed? By how much? What does the company’s financial structure look like? And finally – what caused the change?

 

These questions are addressed through horizontal, vertical and causal analysis. Horizontal analysis shows changes over time, while vertical analysis helps examine the structure of individual elements of the financial statements.

 

  1. Horizontal analysis – what has changed in the company?

 

Horizontal analysis involves comparing the same financial items across different periods – for example, 2025 and 2026.

 

It allows us to determine whether revenue has increased, how costs, receivables or liabilities have changed, and whether the company’s assets are growing faster than its debt.

 

The simplest calculation is the absolute change:

 

Change = value at the end of the period – value at the beginning of the period

 

If revenue increased from PLN 10 million to PLN 12 million:

 

12 million – 10 million = +PLN 2 million

 

We can also calculate the growth index:

 

Growth index = value at the end of the period / value at the beginning of the period × 100%

 

In our example:

 

12 / 10 × 100% = 120%

 

This means that revenue represents 120% of the previous period’s value, which corresponds to an increase of 20%.

 

When analysing financial data, it is important to consider both percentage and absolute changes. A large percentage change in a relatively small item may be less significant than a change of only a few percent in an item worth millions.

 

  1. Vertical analysis – what are the company’s finances made up of?

 

The second step is vertical analysis, also known as structural analysis.

 

Here, instead of primarily asking “How much did it increase?”, we ask:

 

“What proportion of the total does this item represent?”

 

The basic formula is straightforward:

 

Structure = analysed value / total value × 100%

 

For example, if a company has total assets of PLN 20 million and inventories of PLN 5 million:

 

5 / 20 × 100% = 25%

 

Inventories therefore represent 25% of the company’s total assets.

 

The same approach can be used to analyse the structure of financing, costs or revenue. This allows us to identify not only changes in value but also shifts in the proportions within the company.

 

  1. The most important question: why?

 

Horizontal analysis may show that costs increased by 15%. Vertical analysis may reveal that payroll costs have begun to account for a larger proportion of revenue.

 

But the manager should still ask:

 

Why?

 

This is where causal analysis begins.

 

Its purpose is to identify the factors affecting a particular result and determine the strength of their impact. In other words, we move from the statement “the result has changed” to an understanding that “the result has changed for specific reasons.”

 

For example, an increase in payroll costs may result simultaneously from higher production volumes, greater labour intensity per unit of output, or a change in wage rates.

 

Causal analysis makes it possible to separate the impact of individual factors and only then formulate meaningful conclusions.

 

From numbers to decisions

 

This is where financial analysis stops being merely about calculations.

 

If sales increase by 20%, we might say: “Excellent result.” But if receivables increase by 60% at the same time, a very different question arises: has the increase in sales actually translated into cash for the company?

 

Similarly, an increase in profit does not automatically mean that the company’s overall financial condition has improved, while an increase in costs does not necessarily indicate a negative development. Costs may have risen because the company expanded the scale of its operations.

 

Financial figures should therefore be analysed in relation to one another and over time. In practice, a more comprehensive assessment of a company should also include comparisons with similar businesses operating in the same industry and consideration of the broader economic environment.

 

Financial analysis as a management tool

 

You do not need to be an accountant to use financial statements effectively.

 

Accounting provides the data. The role of good analysis is to turn data into information, information into understanding, and understanding into decisions.

 

It is therefore worth remembering a simple sequence:

 

HORIZONTAL ANALYSIS → What has changed?

VERTICAL ANALYSIS → How has the structure changed?

CAUSAL ANALYSIS → Why has it changed?

DECISION → What should we do about it?

 

And from a management perspective, the final question is the most important one.

 

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