Financial statement analysis is the process of reviewing and analyzing financial statements to identify problems, make recommendations for improvement and make informed decisions about financial investments. Financial statement analysis includes the following :
1. Examining the operating and financial results of a company to identify trends and patterns
2. Identifying areas where improvements can be made
3. Evaluating the company’s financial position and prospects
4. Making decisions about whether to buy, sell or hold the stock of a company
5. Conducting sensitivity analysis to determine the impact of potential changes in assumptions on the results.
Financial statement analysis is a process that helps a business understand how well it is doing financially and whether there are any areas of improvement. The financial statement is a document that contains a company’s financial information for one or more periods. The most common statement is the annual one, but there may also be monthly, quarterly, or even weekly statements.
The initial step in financial statement analysis is to gather the data. This may be done manually or through automated system. Once the data is collected, it must be organized and analyzed. This will help to determine how the company is performing financially and what areas need improvement.
Financial statement analysis includes the examination of the following financial statements:
1. Income statement: An income statement, also known as an income statement chart, is a financial statement that shows the changes in a company’s income over a period of time. An income statement shows how much money the company earned, how much money it spent, and how much money it had left over.
2. Balance sheet: A balance sheet is a financial statement that shows a company’s assets, liabilities, and net worth at a specific point in time. It is a critical tool for investors, regulators, and others who want to understand a company’s financial health.
A balance sheet is made up of three main sections: the assets section, the liability and owners equity
3. Cash flow statement: A cash flow statement is a financial statement that tracks the cash inflows and outflows of a company over a specific period of time. These statements are often used as a basis for making financial decisions, such as whether to invest in a new product or hire more employees. The cash flow statement is divided into four main sections. (i) cash involving operating activities (ii) cash involving investing activities (iii) cash involving financing activities (iv) supplementary information
4. Profit and loss statement: A business’s profit and loss statement is a summary of the financial performance of the business over a specific period of time. It shows how much money the business made and how much it spent. It also shows how much money the business is worth. A business’s profit and loss statement can be used to calculate its net income.
5. Ratio analysis: Ratio analysis is a technique used to compare the profitability of two or more investments. By breaking down the ratios of each investment, you can better understand how profitable each one is and make the best decision for your portfolio.
6. Valuation analysis: Valuation analysis is the process of determining a value for a company or securities. The goal of valuation is to establish an appropriate price for a security or company based on the expected future cash flows (i.e. dividends and earnings).
Financial statement analysis typically involves five steps:
1. Gathering financial data
2. Analyzing data
3. Making decisions
4. Communicating results
5. Acting on findings
PREPARING FOR EXAMS (Part 2)