An introduction to financial Analysis -

Understanding and managing a business requires proficiency in finance language. This means that you must be able both to understand and interpret financial information and present data through financial reports.

Managers of businesses need to understand financial information. All business goals and objectives are defined in financial terms. Their results can also be measured in financial terms.

Finance also includes the examination of financial statements to provide valuable information that can be used to make management decisions.

This makes financial analytics one of the most important aspects of finance. The company’s statements and accounts contain a lot of information. Financial Analysis is all about understanding the implications of the statements.

What is Financial Analysis?

Because it provides insight into an organization’s future health and potential liabilities, financial Analysis is an integral part of commercial operations. This information is useful for investors and lenders to determine interest rates or prices for stocks. It also allows company managers to assess their performance relative to industry growth or expectations.

The management views financial Analysis as essential to the success of the company. It reveals the strengths and weaknesses of the company, which directly impacts competitiveness.

Many ways can be used to analyze financial data, such as calculating financial ratios from financial statements or comparing these ratios with historical data of other companies or organizations.

Types and Financial Analysis

Fundamental Analysis:

You can view the company’s intrinsic value using related economic and financial factors with the fundamental Analysis.

Analysts used this technique to assess the main factors that affect security’s value. These factors could be macroeconomic elements like state policies or environmental factors supporting specific industries or microeconomic factors such as the company’s management.

This technique gives you the ability to find companies that are long-term investors and create wealth.
Analysts use this technique to identify stocks at under or overvalued prices and determine a fair market price for those stocks to assist investors in making investment decisions.

Analysts will recommend that you sell a stock if it trades at a higher price than its fair value.

Types Of Fundamental Analysis

Two broad categories can be used to group the various elements of Fundamental Analysis:

Qualitative Analysis

It covers the company’s vision, quality of its executives, vision, brand recognition, patents, proprietary information, and technology. It is generally related to the business’s nature and the standard of its organization rather than to its quantity.

Quantitative Analysis

Quantitative Analysis of financial statement data is used to better understand the company’s financial performance before making investment decisions. The three most important financial statements for quantitative Analysis are income statements and balance sheets.

Technical Analy:

Technical analyst analysts assess investment opportunities by analyzing past statistical trends like volume and price. Technical analysts believe that stock prices are more likely than not to move consistently with the past trend.

Stock market psychology and emotions are the keys to understanding trends. Technical analysts analyze past data charts to understand market fluctuations and market psychology to help them better understand stock market trends.

Technical analysts believe that history will repeat itself. We can better understand investment opportunities if we know past trends and patterns.

Both fundamental and technical analysis is necessary to make a market strategy that works.

What is Financial Analysis?

Corporate finance analysis:

The company’s internal financial analyst, like the accounting department, performs this Analysis and shares the reports with management to help them make better decisions. This Analysis includes the Present Net Value (NPV) and Inter Rate of Return (IRR).

Investment financial analyses:

This is where an external analyst analyzes business to invest. Analysts generally use either top-down or bottom-up approaches.

Before investing, the top-down Analysis considers all macroeconomic factors, such as which sectors have the growth potential. After that, they narrow down to the most suitable companies to invest in specific sectors.

Analysts use microeconomic approaches to analyze bottom-up companies. Then, they conduct ratio analysis in the same way as corporate financial Analysis.

The key elements of financial analysis include:

1. Statement of income

2. Balance Sheet

3. Statement on cash flow

Income statement

The income statement shows how the company performed over some time in terms of financial gain or business profitability. Analysts use this report to forecast the company’s future performance and future cash flows. The P&L, statement of earnings or statement of operations also refers to the income statement.

The top line is revenue collected by a business over a specific period. The bottom line represents net profit or loss. There are also operating expenses, which are business expenses that are included between the top and bottom lines.

Balance sheet

A balance sheet is a company’s financial statement that lists its assets and liabilities. It also shows what the company owns and owes.

Assets: According to balance sheet analysis, assets are written from top to bottom regarding their liquidity. If an asset can be converted into cash in less than a year, it will be classified under current assets. Current assets include cash, marketable securities and inventories.

An asset that cannot be converted into cash in a year is considered a long term asset. A company’s long term assets include land, machinery, equipment and intellectual property.

Liabilities -Money, a company, owes outside parties. The definitions of current liabilities and long term liabilities are similar. Current liabilities must be paid within one year. Current liabilities include interest payable, wages payable and rent.

Long-term liabilities that are due and must be paid within one year. Examples include long-term debt and deferred tax liabilities.

Cash flow Statement

Any company can report all types of cash inflows or outflows on its cash flow statements. These include cash from operations and external investments to pay for business activities and events.