What financial analysis all you need to know about
I will start first with a simple definition of financial analysis.
The term financial analysis refers to the assessment of the viability, stability. and profitability of a business. subsidiary business or venture. This financial analysis is conducted by specialists who prepare reports using ratios that use data taken from financial statements and other reports. or in a clearer sense.
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Financial analysis is:
It is a process through which companies, budgets, and others are evaluated to determine their performance and suitability.
When looking at a particular company. the financial analyst analyzes based on the income statement, balance sheet, and cash flow statement. One of the most common ways to analyze financial statements is the analysis of financial ratios.
Why do we do financial analysis?
The importance of financial analysis as a tool concerned with the study of financial statements in a detailed analytical manner that clarifies the relationships between the elements of these lists.
and the changes that occur to these elements in a specific period of time or multiple time periods: Financial analysis in the following points:
- Knowing the credit ability of the company
- Knowing the revenue capacity of the company (and determining the efficiency of the activity carried out by the company)
- Knowing the optimal financing structure and financial planning for the company
- Determine the appropriate sales volume through break-even analysis and operational analysis
- Determining the company’s net worth and an indicator of the company’s true financial position
- Determine the company’s cost structure
- Evaluating the performance of senior management
- Assist in the development of future policies and programs for the company and provide an appropriate basis for decision-making
- Determining the fair value of the company’s shares
Financial analysis methods and tools
Financial analysis is divided into two main types:
- Trend analysis includes: vertical analysis and horizontal analysis
- Analysis of financial ratios, including (liquidity, activity, profitability, financial leverage, market)
Vertical financial analysis
In which each financial statement is analyzed independently from others, so that each of its elements is attributed to the total sum of these elements, or the sub-group to which the element belongs.
And thus the relationships between the elements of the financial list are studied on a total basis and on a specific date to analyze and diagnose the type of activity that has been achieved The clearer contribution to the overall activity on the one hand, and the discovery and evaluation of its behavior on the other hand.
The importance of this analysis lies in transforming the relations into relative relations. which enables to find the relative importance of each item in relation to the sub-group to which it belongs.
This method is criticized because it is a static analysis characterized by stagnation and not expressing the full picture of the company’s performance.
as it depends only on one time period and does not clearly explain the relationships between the different accounts.
Horizontal financial analysis
Directional analysis by avoiding to some extent the feature of time inertia that characterizes vertical analysis by studying the movement of the item,
or the financial ratio over several financial periods to identify the amount and direction of the change in the movement of the item or the financial ratio, which provides it with the characteristic of dynamism and expression of a more picture Accuracy about the reality of the facility and about future trends.
It is sometimes called moving analysis because it is based on knowing the direction of development of the paragraphs of the financial statements.
But it is also directed to this analysis, in its fractions, about the exact expression of some paragraphs of the financial statements
such as working capital, which is characterized by constant change during the period.
Financial analysis using financial ratios
Ratio financial analysis is somewhat synonymous with the vertical analysis method, in which the figures in the statements for the same financial period are compared.
So that the accounts or items of the financial statements that are causally linked to each other are compared, and the outcome of this comparison is a financial ratio.
Objectives of the results of financial ratios:
- Knowing past performance – measuring performance over past periods of time for the company (eg, the last 5 years)
- Knowing future performance – measuring expected performance using past numbers and certain statistical and mathematical methods that include present and future values. This inductive method is the main source of errors in financial analysis, as past statistics can be poor predictors of future possibilities.
- Define comparative performance – comparison between similar companies.
According to these causal relationships, a large number of financial ratios can be derived.which enables financial analysts to use them as indicators in evaluating the performance of companies and their various aspects of their activities.
The most important financial ratios
- Liquidity Ratios
- Activity Ratios
- Profitability Ratios
- Leverage Ratios
- Market Ratios
What financial analysis all you need to know about