Financial statement analysis is a process of analyzing a company's financial statements for better and smooth decision-making purposes. The company's finances must be evaluated through financial statement analysis, helping shareholders, investors, and other interested parties, to know the exact financial status of the firm. Management utilizes financial statement analysis tools to determine a company's financial condition and makes decisions regarding improvements.
Types of financial statement
To manage the operation of business and to provide transparency to stakeholders, companies use various types of financial statements.
1. Balance sheet:
It is used to compare assets and liabilities. Balance sheet provide useful thumbnails of your company's overall return on assets, owner's equity, debt-equity ratio, but don't show the whole picture and are best reviewed with the help of other metrics to provide maximum strategic value.
2. Income statement:
It compares revenues generated to expense paid, to measure profitability within a specific period of time. Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin or net profit margin, which each divide profit by revenue. Profit margin helps to show where the company costs are low or high at different points of the operations.
3. Cash flow statement:
It documents the amount of money flowing into and out of your company for a given period of time. It helps to provide an overall overview of the company's cash flows from various different financing activities. You will get to know how much cash is available with the company once the entire calculation ends.
These statements are inter-connected and create different view of a company's activities and performance.
How can financial statement analysis benefit a company?
Financial statement analysis evaluates a company's performance through its balance sheet, income statement, or statement of cash flow. By using a number of techniques and tools, investors may develop a more nuanced picture of a company's financial profile. Financial statements should be analysed once a year, to take full advantage of the information they offer.
Financial statements analysis tools:
When an analyst is dealing with a financial issue or wishes to understand the financial implications and economic trade-offs involved in decisions about business investment, operations or financing, a wide variety of analytical techniques and tools are used, easily available in the market. Therefore, choosing the appropriate tools is an important aspect of the entire decision-making process.
Many different types of tools are used for analysing the financial statements. The correct tool is then selected on the basis on the purpose of analysis. Let us go through the various tools to analysis financial statements:
1. Comparative statement:
A comparative financial statement shows the financial positions and profitability at different period of time. These statements give an idea of the enterprise's financial position of two or more than two years. It is to be noted that comparison of financial statement is only possible when same accounting principles are used in preparing these statements. The two most famous comparative statements that are usually prepared are comparative income statement and comparative balance sheet.
2. Common-size statements:
Financial statements can be misleading, if read with absolute figures. Therefore, a common size statement is used in percentage form, taken as a common base. The balance sheet is compared to the the total assets and total liabilities in terms of percentage by considering the total assets and total liabilities. The common size statement can be compared with those of previous years. They can also be compared with those of similar businesses with similar accounting policies.
3. Trend analysis:
Trend analysis refers to the study of movement of figures over a period of time. Calculations of ratios is done for different items for various period and then compared under trend analysis. The first year is always taken as the base year and the figures for the other years are expressed as a percentage to the base year and the trend is determined. Using this analysis can help detect the company of its good or poor management.
4. Fund flow analysis:
Fund refers to the working capital, meaning excess of current assets over current liabilities. Fund flow analysis is concerned with the preparation of fund flow statement which shows the inflows and outflows of funds in a given period of time. Fund flow analysis is useful in judging the credit worthiness, financial planning, and preparation of budgets.
5. Cash flow analysis:
The movement of cash inflow and outflow in a business is actually cash flow analysis. The flow of cash into the business is called the cash inflow, whereas the flow of cash out of the firm is called cash outflow and the total difference between these two i.e. inflow and outflow of cash is called the net cash flow. Cash flow statements are prepared to know how much cash has been received and utilized during an accounting year. Now easily assess the liquidity of a firm by evaluating the operating, investment, and financing decisions.
Why choose Perfios?
Financial statement analysis tools of Perfios will help to evaluate and interpret a company's financial statements for various purposes like planning, investment, and overall performance. Amidst the hectic work of the company, adding one more work to your busy schedule is not fair! Invest you time in doing more good work for your company and leave the financial analysis work to us. Get in touch with us to know about tools available in the market, that will carry out the financial analysis based on the various needs.
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