To assess the actual situation and performance of a company, financial analysis is essential. It is also thanks to this type of analysis that difficulties can be detected, and corrective measures can be applied to solve them. It is necessary to learn financial analysis to make an efficient diagnosis. Financial analysis is based on the calculation of indicators that express liquidity, operational efficiency, profitability, solvency, among others. To obtain valid, accurate, and current information, the financial analysis must be based on inflation-adjusted figures.
Main Methodologies of Financial Analysis
Financial analysis selects, relates, and evaluates the financial statements of a company for which it is necessary to select all the necessary information. There are two main methodologies for doing so.
- Vertical analysis: determines the relative share of each item in a common category. It establishes the structure of assets and their financing through the presentation of participation ratios. And it allows observing structural changes.
- Horizontal analysis: absolute and relative: it seeks to determine the absolute or relative variation that each item in the financial statements has undergone in one period concerning another. It determines the growth or decrease of an account in a given period. It indicates whether a company's performance in a given period was good, fair, or bad.
How to Use the Information Obtained from a Financial Analysis?
The information obtained can be used at two levels:
- At the external level: it serves to convey what the financial state of a company is to third parties (potential investors, tax authorities, or suppliers).
- Internally: it helps managers and middle management to make decisions, knowing the resources available to them.
What Are the Indicators of Interest in a Mid-Month Financial Analysis?
- Liquidity ratios. This measures the company's real capacity to meet short-term obligations, those that must be paid in a period of less than one year.
- Solvency ratios. These determine the company's capacity to pay all its debts, without considering the time factor.
- Corporate profitability. These are a set of indicators that provide information on the profitability of the company. The best known are Return on Investment and Financial Profitability).
- Cash flows. These measure the company's capacity to generate cash. Cash flow is positive if income exceeds expenses and negative if there is a lack of liquidity.
Why Is the Interpretation of Financial Analysis Important?
Financial analyses provide a clear overview and ensure efficient financial management. In this way, plans and decisions can be evaluated. And this is how it can be ensured that financial analysis is an important factor for the success of the business. Understanding the state of the company before the end of the month is important and allows you to take the necessary measures to achieve better results.
Why Learn Financial Analysis?
Taking our online financial analysis course will enable you to acquire the necessary toolsets to pursue a career in private equity, corporate finance, and investment banking. The 180+ hour programme allows you to develop the skills necessary to master various functions in the world of finance. The programme also includes a financial modelling course as well as a valuation and corporate strategy one.
The Accounting and Financial Modelling course is covered in the first 5 weeks, followed by the Valuation and Corporate Strategy course. Finally, in the last 3 weeks Equity research, M&A, and job readiness are covered. The online financial analysis course (FAP) is designed to help you succeed in a short time and meet the challenges of today's world.