Financial Analysis
Financial analysis is a set of procedures established to accumulate, process and analyze qualitative and quantitative information related to the finances of a business. Financial analysis is usually carried out to give an accurate picture of the financial condition of the enterprise, its profits and losses, changes in the structure of assets and liabilities and check whether it justifies investments.
Financial Analysis explained
Financial analysis is intended to assess economic trends, set the strategies of managing the company's finances, outline business objectives and the results it wants to achieve, etc. The financial analysis is done by processing extensive information including different aspects of the company. It is usually carried out based on core financial statements that are the income statement, the balance sheet, and the cash flow statement.
Comparative financial analysis is one of the common types of the analysis of financial statements. It allows the firm’s management to get an idea of an organization's financial performance and compare it not only with prior period statements, but also with reports of a peer company.
For instance, the ROA (return on assets) indicator is used to understand the efficiency of the use of assets involved in the company's activities. It is one of the indicators that helps measure the profitability of a business and compare to similarly sized firms.
Corporate Financial Analysis
In economics, corporate finance is commonly understood as a system of economic relations that take place in the processes of acquisition, allocation, and use of funds in financial and economic activities of corporate structures. The corporate financial analysis refers to an assessment of the financial condition of a corporation, the structure of its capital, the efficiency of using financial resources, the investment feasibility, etc. The accounting department is involved in performing the research that will help a company in making better decisions. Special attention may be paid, for example, to the internal rate of return (IRR). It is used to determine if a project will yield a positive return on investment.
Some companies allow customers extra time to make a payment. It may result in delays in receiving cash from a cash sale transaction. If the company has a lot of cash payments from customers delayed, it should use the days sales outstanding measurement to prevent cash flow problems.
Besides, one of the main components of the corporate financial analysis is extrapolation of a firm’s past performance. Extrapolation is a research method that involves making statistical predictions by using historical data. In this case, business performance is examined to predict future financial performance.
Investment Financial Analysis
Investment financial analysis is carried out to assess the feasibility of investing in a company. Some organizations that are involved in investments and that use services of financial analysts apply the "top-down investment approach". This method enables financial analysts to examine the economy as a whole, then individual industries and, finally, specific companies. They focus on analysis of the stocks of specific companies to decide whether they are worth investing.
By contrast, other independent investment analysts first assess the prospects of individual companies, then examine prospects of industries and, finally, of the economy as a whole. Here, they make decisions based on the microeconomic indicators, such as financial health of the business, study of a company's financial statements, etc.
Types of analysis
Two major types of financial analysis include fundamental analysis and technical analysis.
Fundamental analysis. Fundamental analysis is an independent method of evaluating securities and issuers. During the fundamental analysis, the investor examines the financial and accounting reports of the company and strives to find the fair value of its securities. As a result, fundamental analysis helps investors choose securities that will produce income in the future.
Technical analysis. Technical analysis is a method of assessing the situation in the financial market for making trading decisions based on statistical patterns of price movement. In other words, when traders and analysts try to determine when to buy or sell an asset by monitoring only the price movement, they are dealing with technical analysis. With the help of a graph, they analyze the levels of supply and demand, monitor market sentiment, etc.
