Tools of Financial Analysis

When evaluating the results of an analysis, a firm must recognise that the information gathered must be compared to that of other companies in the industry. It is also vital for the organisation to analyse its historical performance and compare it to its present and future aspirations. This article will examine all financial analysis tools and their applications. The financial analysis statement is a method that may be used to analyse different components of profitability over a certain period in detail. Additionally, the company’s Financial Status is scrutinised and examined on a specific day in Financial Status.

Tools of Financial Analysis

Comparisons Statements

An analysis of a company’s financial status and profitability over an extended period is a financial statement or a horizontal analysis. A company’s financial accounts can be examined using horizontal analysis throughout time. An increase in a metric over last year’s base value is the most common way to show it. It is much easier to see patterns and trends in financial statements when you apply horizontal analysis. These financial statements provide an overview of the enterprise’s financial status for two or more years. It is only feasible to compare financial statements when the same accounting standards are employed to prepare both financial accounts.

Comparative Analysis of Financial Statements

To determine the development of a business, it is necessary to examine the different assets and liabilities of the organisation on various dates. Creating a comparison of balances from one date to another is also essential. It is necessary to have two columns for the data from the original balance sheets to comprehend the comparative balance sheet. A third column indicates whether the numbers have increased or decreased. The fourth column provides percentage gains or declines in either direction.

When comparing balance sheets from various periods, the following characteristics may be observed:

• The current financial condition and the liquidity status are both necessary
• The financial situation throughout the long run
• Profitability of the organisation

Common – Size Statements

‘Vertical analysis’ is another term used to describe common size claims. When financial statements are interpreted in absolute numbers, they might be deceptive. As a result, the percentage form is considered while performing a vertical financial information analysis. The income statement, balance sheet, and cash flow statement are common size financial statements.

Balance Sheet Statement of a Standard Size

The balance sheet gives a picture of the firm’s assets, liabilities, and shareholders’ equity for the reporting period. The same principle applies to a common size balance sheet as it does to a common size income statement. Assets equal liabilities + stockholders’ equity is the balance sheet equation.

Because of this, the whole Balance Sheet gets turned into percentages. A Balance Sheet converted to this format is a Common-Size Balance Sheet. The following profit and loss components are compared in the same way:

• by assuming that the total earnings are 100 per cent of the total incomes in terms of percentage
• by assuming that the entire expenditures are 100 per cent of the whole expenses, to the total expenses in terms of percentage

Analysis of Trends

The Pyramid Method is another name for this technique. Trend analysis is the process of examining the operational performance and financial status over some time. Calculations of different items’ ratios for various periods are performed and then compared as part of this investigation. Examining the ratios over the years is done to determine if the company is increasing or downward. Monitoring this financial analysis may determine the presence or absence of good or bad management.

Analysis of Ratios

The ratio analysis of financial statements is a quantitative study of information provided in a company’s financial analysis statements. This section discusses the important link between different elements on a balance sheet and a company’s profit and loss statement.

A financial or accounting ratio is used when comparing two numerical figures from an enterprise’s financial statements. Several common ratios can be used to assess the financial health of a company or organisation.

Analysis of Cash Flows

Cash flow analysis is the study of the actual movement of money into and out of a firm. The cash influx into a firm refers to the flow of funds into the company. In a similar vein, the movement of funds out of a company is called cash outflow. The net cash flow is defined as the difference between the cash inflow and cash outflow. In the course of an accounting year, a cash flow statement is generated to predict the method in which cash has been received and used.

Analyse on the average

Whenever the trend ratios for a company concern are determined, the resulting ratios are compared to the average for the industry. These two tendencies may be represented on graph paper in curves and straight lines. The fact that the information is presented in images makes the financial analysis and comparison more complete and visually appealing to the audience.

Conclusion

Financial analysis statements are a formal manner of recording an entity’s financial activity. The reports provide financial data that determines a company’s overall financial development and strength. It reflects a company’s financial and commercial transactions. Financial statements offer data in a structured way that facilitates retrieval.

Financial statements are divided into three types: balance sheet, income statement, and cash flow statement. The financial statements also include comprehensive footnotes that cover a wide variety of topics. Other financial statements include equity and income statements.