What is Financial Analysis
The finance and banking sector has evolved on an unprecedented scale over the last two decades. From a few internet transactions to a totally digitized banking experience that can be availed using the smartphones, the game in this segment has changed. Much of this change is owed to change in customer’s behaviour and preferences, for example, the growth in online shopping led people to use online payment methods. They gradually adopted digital banking services as it was more convenient for them to make a purchase.
This evolution in the banking and finance segment is naturally better for the customers and also for the institutions in most regards; it possesses a challenge in terms of complexity in business structure. This complexity has made it necessary for the companies to carry out financial analysis and evaluate the financial standing of the business. Financial analysis is not just limited to banks and other financial institutions but every organization must analyse their financial performance.
So, what exactly is financial analysis? Well, financial analysis can be explained as the process or method of evaluating and assessing a business, project, etc. that involves financial transactions and monetary gains. It is carried out to find out whether it will be feasible to take on a new project or invest in a business or for introspection. It helps to determine whether a business is financially stable and whether it will remain so in the near future. In short, financial analysis is a way to check the financial soundness of an organization.
The Process of Financial Analysis
The demand for financial analyst has grown over the period given its significance in the contemporary business landscape. A financial analysis course can help those who aspire to work in the capacity of a financial analyst in a reputed organization. Now that we have understood what financial analysis is, let’s explore how financial analysis is carried out by experts.
The first and foremost step in carrying out financial analysis is data collection; financial analysts are required to collect historical financial data of the company to conduct a thorough analysis. The data collection process includes collecting data for the last 3 to 5 years from various financial statements including balance sheet, cash flow statements, income statements, shareholder’s equity statement, etc. These statements can be obtained from the annual reports of the company.
Now, after successfully collecting all the relevant data that influences financial standpoint, financial analysts are required to go through the details and identify any large movements from year on year basis. A general analysis of the financial statements is carried out to pick out any abnormalities including any suspicious findings. Then based on these findings the analyst will need to research the business activities in the past to rule out any suspicions.
In addition to looking at the figures mentioned in the financial statements, analysts are required to review the financial notes mentioned to obtain valuable insights regarding the finances. An in-depth individual analysis of each financial statement is done. The balance sheet is analysed to identify any large changes in the assets or liabilities of the business. The income statements or profit & loss statements are analysed to identify any trends over time.
After this, the organization’s shareholder’s equity statement evaluated to find out the change is stock and retained earnings. It is done to answer questions such as whether the company has issued new shares or bought back any from the market. What’s the status of retained earnings? Has it grown or reduced over a given period? These findings are made only after analysing the shareholder’s equity.
In addition to all these, the cash flow statements are also analysed and financial ratios are calculated to evaluate the trends over time. Competitor’s research is also conducted to compare the company’s stats and find out where it’s lagging and what measures are needed to rectify the situation. After conducting this dynamic analysis, an analysis report or review report is created with all the problems and suggestions to overcome those.
Also Read: What Do You Mean By Financial Analysis