Financial professionals must know and learn financial analysis to be able to analyse the statements of finance of an enterprise effectively. This requires a financial understanding of the basic key regions as financial analysis courses will teach you. They are :
- Financial statements structure.
- The market economics of the environment within which the industry operates
- The goals and strategies employed and pursued by the firm to stay ahead of the competition. The route to learn financial statements analysis lies in the below plan or strategy.
Industry characteristics and economic factors considerations: Porter’s Five Forces or economic attribute analysis will help determine the activities performing in the chain.
Ex creation of the product, its manufacture, the distribution channels, retail outlets, price, transportation costs and so on. You now do the value analysis of the chain.
Company strategies identification: Look at the company's product, its nature including the product uniqueness, profit margins levels, brand loyalty creation strategy, and cost control measures. Factors considered are the integration of the supply chain, diversity of geographic locations, industry etc.
Quality of the statements of the organisation’s financial statements assessment: Assess the key statements for relevance within the boundaries of accounting standards. While examining the accounts pay attention to issues of recognition, classification, valuation in the balance sheet accounts to arrive at a proper assessment.
The main focus area checks if the balance-sheet forms a complete and real picture of the economic position in the firm. In assessing the statement of income, the focal area is to make a true assessment of earning quality to be the representation of economic performance in the organisation.
Profitability and current risks analysis: In this step, the financial professionals add value to the financial statements and assessment of the firm through the tools of financial statements.
Common tools for analysis are ratios of the financial statement which are the key to debt management or coverage ratios, liquidity, profitability, asset management, risk management, and market valuation.
Ask the two questions related to profitability namely regarding how very profitable are operations and how much profit accrues to shareholders of equity. This enables the forecasting of the future health of the firm.
Preparation of financial statements and forecasts of financial statements:
Financial professionals will find challenges in making assumptions that are reasonable when speaking of the health and the firm’s future in comparison to the comparative values of growth in the industry.
They will then study the effects of funding and cash flows on these assumptions. Standardization techniques and approaches like sales percentile values help draw up the pro-forma of the financial statements.
Discounted cash flow methodology is most often used from among the many approaches to assessment of firm valuation. Cash flow is assessed and valued in the context of projected and awarded dividends.
More advanced and technical detailed analysis techniques use available cash-flows to the enterprise or shareholders of equity. Yet another way would be to use the value-added economics method of relative valuation and measures which are accounting-based.
The final steps:
On completion of the analysis, valuation and financial statements the integrity of testing is called upon. Are these figures real and true pictures of the firm’s finances and positions?
Many representations are fudged, enhanced and irregularly reported making the final test critical and valuable to the forecasting and financial data analysis. The financial analyst needs to be an ace at recognizing manipulation, detecting frauds, and correcting the statements.