The company’s financial statements are a source of information about the company, not only for analysts but also for the company’s management and a wide range of stakeholders.
When conducting a financial analysis, it is important to understand that the main thing is not the calculation of indicators, but the ability to interpret the results obtained. Whether you need to make a financial analysis for the existing company, or have to do it as a part of your college or university assignment, these tips and explanations given by expert writers from Write My Paper Hub academic essay writing service will come in handy.
How to Make a Stellar Financial Analysis
Analysis of financial ratios and indicators is an excellent tool that provides an idea of the financial condition of a company and its competitive advantages and prospects for its development.
- Performance analysis. The coefficients (indexes) allow you to analyze the change in company performance in terms of net profit, capital utilization, and cost control. Financial ratios can explain the financial liquidity and stability of the enterprise through the effective use of a system of assets and liabilities. Start with analyzing the following coefficients.
- Evaluation of market business trends. Analyzing the dynamics of financial indicators and ratios over a period of several years, it is possible to study the effectiveness of trends in the context of the existing business strategy.
- Analysis of alternative business strategies. By changing the coefficients in the business plan, it is possible to analyze alternative development options for the company.
- Monitoring the progress of the company. Having chosen the optimal business strategy, managers of the company, while continuing to study and analyze the main current factors, can see a deviation from the planned indicators of the development strategy being implemented.
- Ratio analysis is the art of interconnecting two or more indicators of a company’s financial performance. Analysts can see a more complete picture of the results of their activity over the course of several years and additionally comparing the company’s performance indicators with industry average indicators.
It should be noted that the system of financial indicators is not a crystal ball in which you can see everything that was and will be. This is just a convenient way to summarize a large amount of financial data and compare the performance of different companies.
The real utility of the calculated coefficients is determined by the tasks. First of all, the coefficients provide an opportunity to see changes in the financial position or results of production activities, help to determine the trends and structure of the planned changes, which helps the management to see the threats and opportunities inherent in this particular enterprise.
Analyzing Assets and Liabilities
Assets are usually classified into three categories:
- Current assets include cash and other assets that must be transferred to cash within one year (for example, securities traded on the stock exchange; accounts receivable; notes receivable; current assets and advances).
- Land ownership, fixed assets, and equipment (fixed assets) will include funds that are characterized by a relatively long service life. These funds are usually not intended for resale and are used in the production or sale of other goods and services.
- Long-term assets include the company’s investment in securities, such as stocks and bonds, as well as intangible assets, including patents, the costs of monopoly rights and privileges, copyrights.
Liabilities are usually divided into two groups:
Equity is the rights of the owners of the enterprise. Regarding accounting, this is the balance after deducting liabilities from assets. This balance increases with any profit and is reduced by any losses to the company.
- Short-term liabilities include accounts payable that must be paid within one year, for example, accrued liabilities and notes payable.
- Long-term liabilities are the rights of creditors, which do not necessarily have to be implemented within one year. This category includes liabilities on bonds, long-term bank loans, mortgages.
Analyzing financial indicators, it is always necessary to keep in mind that the assessment of the results of operations is made on the basis of data from past periods, and on this basis, it may be incorrect to extrapolate the future development of the company. However, financial analysis should be directed to the future.