Learn Financial Analysis: What Are The 13 Forces That Drive It?
Financial analysis is not an easy subject for the layman to learn. It requires a deep understanding of finance, statistics, and accounting. We have good news for you if you've been looking for ideas on understanding financial analysis! We've compiled a list of 13 forces driving financial analysis so that you can learn it today!
Table of Contents
- 1 Gross Profit Margin
- 2 Working capital
- 3 Net Profit Margin
- 4 Quick Ratio
- 5 Leverage
- 6 Inventory Turnover
- 7 Debt-to-Equity Ratio
- 8 Current Ratio
- 9 Total Asset Turnover
- 10 Return on Assets
- 11 Return on Equity
- 12 Seasonality
- 13 Operating Cash Flow
Gross Profit Margin
A profitability ratio called gross profit margin calculates the portion of revenue after deducting the cost of goods sold.
Working capital is a measure of a company's operating liquidity that can get used to finance ongoing operations.
Net Profit Margin
The net profit margin is the revenue and other income left over after all business costs, such as goods sold operating expenses, interest, and taxes.
Another liquidity ratio that assesses a company's capacity to meet short-term obligations is the quick ratio, also referred to as the "acid test ratio." Only highly liquid current assets, such as marketable securities and accounts receivable, are used in the numerator of the quick ratio.
Leverage helps companies grow through debt financing; however, when misused, it can lead to bankruptcy due not limited precisely simply because consumers do not want too much debt at once!
Inventory turnover is the ratio of the cost of goods sold to the average inventory. It gets calculated by dividing the cost of goods sold by the average inventory.
The debt-to-equity ratio is a measure of a company's financial leverage. It is the percentage of total liabilities divided by total equity. You can use it to determine whether the company has too much debt relative to its liquid assets.
The current ratio measures the ability of a company to meet its short-term obligations. This can help analyze a company's liquidity, showing how much money you would have if you had to use your account immediately.
Total Asset Turnover
Total asset turnover is a measure of an organization's effectiveness in generating revenue from its assets.
Return on Assets
Return on assets (ROA) is a ratio that measures how well a company uses its assets to generate earnings. It gets calculated by dividing net income by average total assets.
Return on Equity
Return on equity (ROE) measures how well management uses the company's equity to generate returns for its shareholders.
Seasonality is when sales are higher in some months than others. Companies also commonly experience seasonal trends due to changes in the economy or industry dynamics.
Operating Cash Flow
It is the cash generated by a business from its normal operations. It's not the same as free cash flow, which is net income after taxes and other non-cash charges such as depreciation or amortization.
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