Financial Analysis
Candlefocus EditorThe process of financial analysis typically begins with the review of the company’s financial statements and other financial information. These documents provide a comprehensive view of the company’s financial performance and include the balance sheet, income statement, and cash flow statement. Financial ratios are then calculated from these documents to assess the company’s performance.
Ratios can be used to measure a company’s liquidity, profitability, debt, efficiency, and valuation. Commonly used ratios include the current ratio, gross margin ratio, debt-to-equity ratio, return on equity, and price-to-earnings ratio. Analyzing these ratios, as well as industry-specific benchmarks, helps determine the current health of the business and signals future financial performance.
In addition to the analysis of financial performance, financial analysis also includes the study of economic trends and the market environment. These macro-level factors can have an immense impact on the organization’s financial performance and should be considered in the overall analysis.
Financial analysis can be conducted in two main ways. Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security. Fundamental analysis seeks to identify true value by assessing quantitative and qualitative information about a company. By evaluating factors such as earnings, income growth, debt, and liquidity, securities are valued based on their financial health. Technical analysis assumes a security’s value is already determined by its price and focuses instead on trends in value over time. Technical analysts study historical price information and identify patterns to predict future price movements.
Whether conducted internally or externally, financial analysis is a vital part of any business. It helps identify the strengths and weaknesses of a company and helps inform sound business decisions. It can help fund managers make future business decisions or review historical trends for successes, and it can also help investors determine the best possible investment opportunities.