Give a 200 to 300 word explaination of the three tools of financial statement analysis.

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Financial statement analysis is a crucial aspect of evaluating the financial health and performance of a company. There are three primary tools used for financial statement analysis: ratio analysis, common-size analysis, and trend analysis.

Ratio analysis involves analyzing various financial ratios derived from the company's financial statements. These ratios provide insights into the company's liquidity, profitability, solvency, efficiency, and market value. Some commonly used ratios include the current ratio, return on assets (ROA), return on equity (ROE), debt-to-equity ratio, and gross profit margin. By comparing these ratios with industry standards or historical data, analysts can assess a company's financial position and performance relative to its peers.

Common-size analysis, also known as vertical analysis, involves expressing financial statement figures as a percentage of a base value. This allows for a more detailed assessment of each line item's contribution to the overall financial picture. For instance, in the income statement, each revenue and expense item is expressed as a percentage of net sales. This analysis helps identify trends, cost structure, and areas of concern, enabling better decision-making.

Trend analysis involves examining financial statement data over a period, usually multiple years, to identify patterns, changes, or deviations. By analyzing trends in revenue growth, profitability, and key financial ratios, analysts can understand the company's historical performance and predict future outcomes. Trend analysis provides insights into the company's stability, growth potential, and ability to withstand economic fluctuations.

To utilize these tools, one must have access to the company's financial statements, including the balance sheet, income statement, and cash flow statement. These statements can typically be obtained from the company's annual reports or SEC filings. Professionals specialized in financial analysis, such as accountants, financial analysts, or investment professionals, often carry out this analysis.

In conclusion, financial statement analysis involves the use of three main tools: ratio analysis, common-size analysis, and trend analysis. These tools provide valuable insights into a company's financial position, performance, and future prospects. By utilizing these tools, analysts can make informed business decisions, assess risks, and identify areas for improvement.