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Financial Analysis

Notes on Financial Analysis

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16 views2 pages

Financial Analysis

Notes on Financial Analysis

Uploaded by

Joanne
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Analysis: A Comprehensive Overview

Financial analysis is the process of examining a company's financial statements, including the
income statement, balance sheet, and cash flow statement, to assess its financial
performance, financial position, and overall financial health. It involves analyzing various
financial ratios and metrics to gain insights into a company's profitability, liquidity, solvency,
efficiency, and risk.

Key Components of Financial Analysis

1. Financial Ratios:
o Profitability Ratios: Measure a company's ability to generate profits. Examples
include:
 Gross profit margin
 Net profit margin
 Return on assets (ROA)
 Return on equity (ROE)
o Liquidity Ratios: Assess a company's ability to meet its short-term obligations.
Examples include:
 Current ratio
 Quick ratio
 Cash ratio
o Solvency Ratios: Evaluate a company's ability to meet its long-term obligations.
Examples include:
 Debt-to-equity ratio
 Debt-to-assets ratio
 Interest coverage ratio
o Efficiency Ratios: Measure how efficiently a company is using its assets.
Examples include:
 Inventory turnover ratio
 Accounts receivable turnover ratio
 Asset turnover ratio
o Market Ratios: Assess a company's market value and investor sentiment.
Examples include:
 Price-to-earnings (P/E) ratio
 Price-to-book (P/B) ratio
 Dividend yield
2. Financial Statement Analysis:
o Horizontal Analysis: Compares financial statements over time to identify trends
and changes.
o Vertical Analysis: Expresses each item on a financial statement as a percentage
of a key figure (e.g., total assets for the balance sheet, net sales for the income
statement).
o Common-Size Analysis: Standardizes financial statements to make comparisons
easier between different companies or time periods.
3. Cash Flow Analysis:
o Examines the inflows and outflows of cash to assess a company's liquidity and
financial health.
o Includes the operating activities, investing activities, and financing activities
sections of the cash flow statement.

Uses of Financial Analysis

 Investment decisions: Investors use financial analysis to assess the investment potential
of a company.
 Credit decisions: Lenders use financial analysis to evaluate a company's
creditworthiness.
 Internal management: Managers use financial analysis to make informed decisions
about operations, resource allocation, and strategic planning.
 External stakeholders: Analysts, shareholders, and regulators use financial analysis to
understand a company's performance and risk.

By effectively analyzing financial information, stakeholders can make informed decisions,


identify areas for improvement, and assess the overall financial health of a company.

Would you like to delve deeper into a specific aspect of financial analysis?

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