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Dream Tank USA Business Mastery Course

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Lesson 4 of5
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Financial Analysis

Financial analysis is used to assess economic trends, set financial policies, develop long-term plans for business activities, and identify projects or companies to invest in. Financial analysts scrutinize the company’s financial statements (income statement, balance sheet, and cash flow statement). A variety of analytical review methods can be performed on the same set of financial statements. The main goals of a financial analysis include: forecasting the company’s future performance and profitability; highlighting strengths and weaknesses; providing insights into factors affecting financial performance; establishing reasonable expectations for investors and securities analysts; identifying growth strategies; recommending capital structure changes; and suggesting actions that increase realizable value.

While a business analyst might evaluate the financial statements of different institutions, the purpose of financial analysis is, generally speaking, a company analysis. This means that you compare the company’s performance against some criteria (such as industry averages or other companies in its field). Financial analysis is associated with the accounting, finance, economics and business fields; and is concerned with assessing the income, assets and liabilities of an organization for the purpose of extracting meaningful information about it, its forecasting future cash flows to make a decision under uncertainty, and has applications in accounting, actuarial science, investment management, and company valuation.

 

Types of Financial Analysis:  Ratio Analysis, Cash Flow Analysis, Profitability Analysis and Valuation and Discounted Cash Flow Analysis

Whenever you are analyzing financial information, especially for a publicly traded company, there will probably be a large number of numbers involved. It is important to have enough knowledge about the different types of financial analysis if you want to be able to interpret financial statements effectively. In this article, I’m going to cover 4 types of financial analyses: ratio analysis, cash flow analysis, profitability analysis, valuation and discounted cash flow analysis.

  • Ratio Analysis – is a tool used to evaluate a company’s performance, comparing the financial ratio for one period with the same period in prior years or with an industry average. To perform ratio analysis, you gather data from several balance sheets, income statements and cash flow statements. From there, you’ll perform a series of calculations to determine whether a company is growing or shrinking, becoming more or less efficient and liquid. The process of identifying, calculating and analyzing ratio data takes time and effort. The bottom line, though, is that it can pay off big-time in terms of providing valuable insight into your business prospects and risks.

  • Cash Flow Analysis – The term working capital is applied to an individual company, or to a group of companies in specified industries. For example, the working capital of a grocery store chain would be calculated as if all the groceries were sold at the beginning of each quarter, and the entire sale price was kept in the cash register overnight. Cash flow analysis indicates how much cash a company has to operate its business. It can help you decide how attractive an investment is by showing you the liquidity of the business and how well it is able to use its cash reserves, pay off debt, and return profits to shareholders via dividends or buybacks.

  • Profitability Analysis – Profitability analysis is an analysis of the profitability of an organization’s output. Output of an organization can be grouped into products, customers, locations, channels and/or transactions. Inputs to the firm can be grouped into financing (including external financing), labor, fixed assets and raw materials. Profit margins are used to compare profit performance between companies and industries.

  • Valuation and Discounted Cash Flow Analysis – Discounted cash flow is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. Slicing and dicing the discount rate and a series of realistic forecasts can then be used to estimate how much the business may be worth on a sale down the road.

Conclusion:

A financial analysis is a vital tool that allows companies to identify flaws in their performance or track progress toward long-term goals. By using data gathered from past performance, the financial analysis is able to project future results and gauge how close a company is to attaining its goals. This analysis can be completed in six simple steps to ensure an accurate evaluation of financial data.

The purpose of this report is to help you better understand the financial dynamics of the company’s business and operations, and to allow you to form your own judgments as to whether or not the company will be successful in reaching its strategic objectives. In conclusion, as you can see, there is a lot of information to look at when analyzing the financials of a company. Careful consideration should be given to each of these items so that you can ensure that you get the full value out of this analysis.