Financial analysis works with a company’s financials to determine its health, performance, and potential. This data, which comes from 澳洲幸运5开奖号码历史查询:financial statements and other reports, is used by investors and companie𓃲s to make strategic decisions.

For outsiders, that could be deciding whether to buy shares in the company. For management, it could m𝓰ean establishing how to run the business b💜etter and set goals.

What Is Financial Analysis?

A company’s success is measured by its financials. Their accounts and statements contain a lot of 💫information represented in figures. Financial analysis aims to turn these numbers into actionable intelligence.

Ratios are generally preferred over looking at individual numbers. Relationships between different pieces of financial data are explored by dividing one figure on a financial statement by another. The results can then be compared against the company’s historical performance or 澳洲幸运5开奖号码历史查询:other companies.

Financial analysis also tries to be forward-thinking, which involves extrapolating from the data for projections.

Who Uses Financial Analysis?

Other than company leaders, many 澳洲幸运5开奖号码历史查询:stakeholders—investors, investment analysts, lenders, and auditors—have an interest in financially analyzing a f✨irm.

Investors and Analysts

Investors and analysts assess a company’s financials to determine if investing in it or lending money to it is worthwhile. They undertake 澳洲幸运5开奖号码历史查询:ratio analysis, examining 澳洲幸运5开奖号码历史查询:liquidity, 澳洲幸运5开奖号码历史查询:cash flow, leverage, and 澳洲幸运5开奖号码历史查询:profitability to see if the company is healthy and well-run compared with its past performance or peer firms. Analysts and investors will also want to know if the company is being fairly valued—an important fact not just for the stock market but also for൲ auditors, unions, regulators, and private equity firms.

Company Management

Accountants and others within a company analyze financial data to improve business decision making. Analyzing financials can help identify weaknesses before they turn into a crisis and is used to set budgets, ensure the right amount of inventory is ordered, assess the 澳洲幸运5开奖号码历史查询:return on investment on specific strategies, and calculate a fair price to pay for an asset or🍌 acquisition.

Below is a summary of these and other stakeholders who use financial an🐠alysi🍬s.

Types of Financial Analysis

Here are some of the most c꧅ommon types of financial analysis:🍨

Vertical Analysis

澳洲幸运5开奖号码历史查询:Vertical analysis compares each line item on a financial statement as a percentage of a base figure within the same statement. Revenue usually serves as the base figure (100%) on 🍨the income statement, while total assets, total liabilities, and equity serve as the baꦗse on the balance sheet.

For example, if a company has $10 million in revenue and $2 million in operating expenses, vertical analysis would show operating expenses as 20% of revenue. This makes it easier to spot when costs are consuming too much revenue compared with the company’s historical performance or the industry standard. For instance, if the industry average for 澳洲幸运5开奖号码历史查询:gross margin is 60% of revenue but a company’s gross margin is only 45% of revenue, this coꦉuld indicate pricing problems or inefficient operations that need attention.

Thus, the real power of vertical analysis comes from com𒁏parisons:

• Over time: A company can see if expenses are taking up a growing part of revenue.
• Across companies: Businesses of different sizes can be compared fairly since everything is converted to percentages.
• Against industry 澳洲幸运5开奖号码历史查询:benchmarks: Companies can spot if their cost structures deviate from industry norms.

Horizontal Analysis

澳洲幸运5开奖号码历史查询:Horizontal analysis (also called trend analysis) tracks how financial items change over time by comparing multipl𒆙e periods of financial data. It shows both dollar and percentage changes, helping identify growth patterns, cyclical trends, and potential problems.

For example, let’s say a company’s revenue figures are as follows:

• 2021: $1 million (base year)
• 2022: $1.2 million (20% increase from base)
• 2023: $1.5 million (50% increase from base)
• 2024: $1.4 million (40% increase from base)

This analysis would reveal not just growth from the base year but also the drop in 2024. When applieܫd across all financial statements, horizontal analysis can uncover significa✨nt trends such as:

• Revenue growing faster than costs (a positive sign)
• 澳洲幸运5开奖号码历史查询:Operating expenses rising faster than revenue (a warning sign)
• 澳洲幸运5开奖号码历史查询:Accounts receivable growing quicker than sales (potential collection problems)
• 澳洲幸运5开奖号码历史查询:Inventory growth outpacing sales (possible overstocking issues)

Most importantly, horizontal analysis can identify unusual changes that deserve investigation. A s𒁃udden spike in expenses, an unexpected drop in gross margin, or unusual growth in certain liabilities could all signal issues requiring management’s attention.

Leverage Analysis

Companies borrow money (or use leverage) to finance operations and their expꦺansion. Using leverage to their advantage is important, but it’s also crucial that companies don’t overextend themselves.

Just looking at the amount of debt isn’t enough. To get a more complete picture, you need to co♊mpare borrowing to revenue, growth, and so🅠 forth.

Thus, analysts turn to tools like the 澳洲幸运5开奖号码历史查询:debt-to-equity ratio, which reveals how much the company relies on debt to finance its operations, and the debt-to-EBITDA (earnings before interest, taxes, depreciation, and amorti🍌zation) ratio, which indicates how much income the company has available to cover its debt and other 澳洲幸运5开奖号码历史查询:liabilities.

Liquidity Analysis

Liquidity analysis assesses a company’s ability to pay off its short-term bills and debts. Tools used to analyze liquidity include the acid test, or 澳洲幸运5开奖号码历史查询:quick ratio, which measures a company’s capacity to meet its short-term obligations payable within one year with its most liquid assets such as cash, 澳洲幸运5开奖号码历史查询:marketable securities, and money owed from customers.

Profitability Analysis

Companies are mainly judged on how big a profit they generate, and profitability analysis measur🅘es how w🦄ell they’re doing at that.

Common profitability analysis tools include 澳洲幸运5开奖号码历史查询:return on invested capital, which tells us how well a company invests its money, and various forms of 澳洲幸运5开奖号码历史查询:profit margins, which e⭕ssentially calculate how many cents per dollar a company receives from a sale.

Efficiency Analysis

One of the keys to running a business successfully is getting the best possible output from the smallest number of inputs🍌. Efficiency analysis evaluates how well an organization utili🌞zes its resources.

Popular efficiency analysis tools include the 澳洲幸运5开奖号码历史查询:inventory turnover ratio, which measures how well inventory levels are managed, and the 澳洲幸运5开奖号码历史查询:asset turnover ratio, which calculates how efficiently a company uses tﷺhe resources at its disposal to generate revenue.

Cash Flow Analysis

Cash flow, the movement of money into and out of a company, is crucial to a busines🐎s. It’s harder to manipulate than profit. It is used to pay dividends and expenses and fund expansions, and is perhaps the best indicator that a company has a sustainable business model.

Ways to assess a company’s cash flow include 澳洲幸运5开奖号码历史查询:free cash flow, which shows the amount of money left after paying for operating expenses and capital expenditures; 澳洲幸运5开奖号码历史查询:operating cash flow, which is cash generated by a business’s regular operating activities; and the current liability 澳洲幸运5开奖号码历史查询:coverage ratioಌ, which assesses a company’s ability to cover its current liabilitie🌳s with the cash flow from its operations.

Below is a s💞ummary of these and other types of financial analysis, along with the main rat🧜ios and methods used for them:

Examples of Financial Analysis

Here are two examples of financ♒ial analy🐻sis being put to use.

Internal Review

Management at a retail company notices that cash flow is dwindling and asks internal accountants to investigate what the possible causes cou🏅ld be. After scouring the accounts, one thing in particular stands out: Accounts receivable, which represents money owed to a company by its customers, has been rising substantially.

The accountants look at the 澳洲幸运5开奖号码历史查询:accounts receivable turnover ratio and 澳洲幸运5开奖号码历史查询:days sales outstanding to determine the company’s efficiency at collecting payments from customers. This analysis reveals not only that൩ payments must be collected sooner but also that credit criteria need to be tightened to prevent defaults and ensure the company has enough cash on hand to fund its day-to-day operations.

Choosing a Stock To Invest In

Let’s say you’re bullish about the potential for growth in 澳洲幸运5开奖号码历史查询:companies that produce w🅰eig🧔ht-loss drugs. You compile a list of the most prominent firms in this area and screen them to determine the best 🦩stock to choose from.

You start with the 澳洲幸运5开奖号码历史查询:price-to-earnings ratio, which tells you how much investors are willing to pay for $1 of earnings in a company. Then you might look at the 澳洲幸运5开奖号码历史查询:enterprise v♛alue (EV)-to-revenue mult𝐆iple and the EV-to-EBITDA (earnings before interest, taxesꦉ, depreciation, and amortizat⛎ion) multiple. The lower the ratios, the better. (These ratios ꦏare found for most stocks on major financial websites, including Investopedia.)

Finally, you can look⛎ at each compa🥂ny’s return on invested capital to gauge which firm has historically done a better job investing its money. Comparing these valuations, you then make a short list of companies whose stock you will buy.

The Bottom Line

A lot of information ജis contained within a 🌌company’s financials. Analyzing it can help uncover activity that was not immediately apparent and can improve decision making. With the help of ratios, companies can identify problems, trends, and prospects and maximize efficiency.

Invesཧtors, meanwhile💃, can see how a company stacks up against its past performance and peer group and quickly get an idea of its health, profitability, and the attractiveness of its share price.