Finance Discovery Day

Financial Analysis

Definition

Financial analysis is the process of evaluating a company's financial performance and position to make informed business decisions.

Objectives

• To evaluate a company's financial health and performance
• To identify areas for improvement and opportunities for growth
• To make informed investment decisions
• To assess a company's ability to meet its financial obligations

Types of Financial Analysis

• Horizontal Analysis: compares line items on a company's financial statements over time to identify trends and changes
• Vertical Analysis: expresses each line item on a financial statement as a percentage of a base item, such as total revenue or total assets
• Ratio Analysis: calculates financial ratios to evaluate a company's performance and position
• Trend Analysis: examines a company's financial performance over time to identify patterns and trends

Financial Statement Analysis

• Balance Sheet: provides a snapshot of a company's financial position at a specific point in time
  • Assets: resources owned or controlled by the company
  • Liabilities: debts or obligations owed by the company
  • Equity: ownership interest in the company
• Income Statement: reports a company's revenues and expenses over a specific period of time
  • Revenues: income generated from sales or other activities
  • Expenses: costs incurred to generate revenues
  • Net Income: profit earned by the company
• Cash Flow Statement: reports a company's inflows and outflows of cash over a specific period of time
  • Cash from Operations: cash generated from a company's core business activities
  • Cash from Investing: cash spent on investments or acquisitions
  • Cash from Financing: cash raised from debt or equity financing

Financial Ratios

• Liquidity Ratios: measure a company's ability to pay its short-term debts
  • Current Ratio: current assets / current liabilities
  • Quick Ratio: (current assets - inventory) / current liabilities
• Profitability Ratios: measure a company's ability to generate earnings
  • Gross Margin Ratio: (revenue - cost of goods sold) / revenue
  • Return on Equity (ROE): net income / total equity
• Efficiency Ratios: measure a company's ability to use its assets efficiently
  • Asset Turnover Ratio: revenue / total assets
  • Inventory Turnover Ratio: cost of goods sold / average inventory

Limitations of Financial Analysis

• Assumes Accurate Financial Data: financial analysis relies on accurate and reliable financial data
• Ignores Non-Financial Factors: financial analysis may not consider non-financial factors, such as management quality or industry trends
• Limited to Historical Data: financial analysis is based on historical data and may not reflect future performance or changes in the business environment

Financial Analysis

Definition

• Evaluates a company's financial performance and position to make informed business decisions

Objectives

• Evaluate a company's financial health and performance
• Identify areas for improvement and opportunities for growth
• Make informed investment decisions
• Assess a company's ability to meet its financial obligations

Types of Financial Analysis

• Horizontal Analysis: compares line items on a company's financial statements over time to identify trends and changes
• Vertical Analysis: expresses each line item on a financial statement as a percentage of a base item
• Ratio Analysis: calculates financial ratios to evaluate a company's performance and position
• Trend Analysis: examines a company's financial performance over time to identify patterns and trends

Financial Statement Analysis

Balance Sheet

• Provides a snapshot of a company's financial position at a specific point in time
• Assets: resources owned or controlled by the company
• Liabilities: debts or obligations owed by the company
• Equity: ownership interest in the company

Income Statement

• Reports a company's revenues and expenses over a specific period of time
• Revenues: income generated from sales or other activities
• Expenses: costs incurred to generate revenues
• Net Income: profit earned by the company

Cash Flow Statement

• Reports a company's inflows and outflows of cash over a specific period of time
• Cash from Operations: cash generated from a company's core business activities
• Cash from Investing: cash spent on investments or acquisitions
• Cash from Financing: cash raised from debt or equity financing

Financial Ratios

Liquidity Ratios

• Measure a company's ability to pay its short-term debts
• Current Ratio: current assets / current liabilities
• Quick Ratio: (current assets - inventory) / current liabilities

Profitability Ratios

• Measure a company's ability to generate earnings
• Gross Margin Ratio: (revenue - cost of goods sold) / revenue
• Return on Equity (ROE): net income / total equity

Efficiency Ratios

• Measure a company's ability to use its assets efficiently
• Asset Turnover Ratio: revenue / total assets
• Inventory Turnover Ratio: cost of goods sold / average inventory

Limitations of Financial Analysis

• Assumes Accurate Financial Data: financial analysis relies on accurate and reliable financial data
• Ignores Non-Financial Factors: financial analysis may not consider non-financial factors
• Limited to Historical Data: financial analysis is based on historical data and may not reflect future performance or changes in the business environment