Corporate financial analysis is a quantitative method of evaluating a company’s financial position, profitability and the market value of its stock. It is based on the audited financial reports that every public company is required to publish annually to comply with regulatory obligations. For instance, every company listed on the Nigerian Stock Exchange is mandated to submit its annual audited financial statements to the Exchange and to the Securities and Exchange Commission.
There are four principal financial statements namely, balance sheet or statement of financial position, profit and loss or income statement, statement of change in equity and cashflow statement. Another important document is the ‘Notes’ to the accounts.
- The statement of financial position provides an overview of assets, liabilities, and shareholders’ equity as a snapshot in time.
- The income statement primarily focuses on a company’s revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company’s profit figure called net income.
- The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.
- The statement of changes in equity records how profits are retained within a company for future growth or distributed to external parties.
- Notes to financial account provide more information about the four main financial statements.
The basic elements and the terminologies associated with the financial statements are explained below:
- Asset – A resource that arises because of past activities from which future benefit is expected to flow into the company. For example, purchase of land and building.
- Liability – A present obligation that arises because of past activities from which future financial obligations are expected to be met by the company. For example, a bank overdraft or a bank debt.
- Equity – Equity is the remaining economic interest in capital after subtracting all liabilities.
- Revenue – Revenue is the inflow of economic benefits during the period arising from the course of the ordinary activities of a business. For example, money received from sale of goods for a trading company.
- Expenses – Expenses can be referred to the losses as well as those expenses that arise during the activities of a business. For example, wages.
- Gains – Gains may mean the net money made from the other activities of a company. For example, selling a subsidiary company.
- Losses – Losses are all expenses from loss-making of one-off sales. For example, settlement of lawsuit.
- Investment by owners – This is also called contributed capital. It may be defined as the amount of assets that the owner puts into a company either to start the business or keep it running. It can be in cash or some other assets.
- Distribution to owners – This is the payment of the part of profit made by a business to its owners. Usually paid in cash or in another form. For example, dividends.
- Comprehensive Income – These are the items of income and expenses that are not recognized in profit or loss. For example, foreign currency transactions which can create gains or losses.