Are you a financial analyst who is looking for ways to diagnose your company's financial health? Financial analysts and business owners can use financial Statement Analysis to get a snapshot of the current financial standing. Many different types of analysis can be performed, but one popular type is liquidity ratios.
What is a Financial Analysis?
Financial Analysis is the process of identifying financial trends and reports to decide which financial options are best. Financial Statements that can be analyzed are Income statements, Cash Flow statements, Balance Sheets.
How do you use Financial Analysis?
You want to analyze how well your company's financial performance measures up against its competitors. This information will help you determine whether or not it's time for specific changes in the business strategy - such as a shift from marketing strategies that reach more customers with fewer costs to those that involve higher cost per customer but better returns.
A comparison between past and current financial data gives insight into where improvements need to be made. The analysis should also include an estimate of future growth prospects & the industry sector.
Some Financial Analysis Methods to Understand Company’s Health:
Horizontal Analysis
This technique is used to evaluate financial data by comparing results & identifying y-o-y changes in the balance sheet or income statement. By analyzing this, the company’s financial strengths and weaknesses can be identified.
Vertical Analysis
This financial statement analysis is conducted to measure the company’s performance over a while. A vertical study provides high-level research and compares items to the last two years or against an industry benchmark.
Trend Analysis
Trend analysis spots recent trends of increasing or decreasing finances in financial statements. It uses historical data to forecast future sales & performance.
By reviewing percent change in the balance sheet & income statement over time, companies identify expected to decrease or increase in the near future and formulate appropriate strategies to maximize or minimize it.
Ratio Analysis
Ratio analysis measures a company’s ability to pay liabilities, sell inventory, collect receivables, & pay back debt. Ratios help in measuring profitability & analyze a company’s stock as a viable investment choice.
Acid-Test Ratio
By adding cash, short-term investments, net receivables, and then calculating the sum by total current liabilities, the acid test ratio is calculated. It only measures your company’s ability to pay back its current penalties.
There are many other methods like average collection period, debt ratio, gross profit margin, operating profit margin, net profit margin, earnings per share, etc. Financial analysts are professionals who use financial statements & models to assess a company’s health.
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