Financial Analysis - Wikipedia

Financial analysis - Wikipedia, the free encyclopedia
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http://en.wikipedia.org/wiki/Financial_analysis
From Wikipedia, the free encyclopedia
Financial analysis (also referred to as financial

statement analysis or accounting analysis) refers to an
assessment of the viability, stability and profitability of a
business, sub-business or project.
It is performed by professionals who prepare reports using
ratios that make use of information taken from financial
statements and other reports. These reports are usually
presented to top management as one of their bases in
making business decisions. Based on these reports,
management may:
Continue or discontinue its main operation or part
of its business;
Make or purchase certain materials in the
manufacture of its product;
Acquire or rent/lease certain machineries and
equipment in the production of its goods;
Issue stocks or negotiate for a bank loan to increase
its working capital;
Make decisions regarding investing or lending
capital;
Other decisions that allow management to make an
informed selection on various alternatives in the
conduct of its business.
Accountancy
Key concepts
Accountant Bookkeeping Trial balance General
ledger Debits and credits Cost of goods sold
Double-entry system Standard practices Cash and
accrual basis GAAP / IFRS
Financial statements
Balance sheet Income statement Cash flow
statement Equity Retained earnings
Auditing
Financial audit GAAS Internal audit
Sarbanes-Oxley Act Big Four auditors
Fields of accounting
Cost Financial Forensic Fund Management
Tax
1 Goals
2 Methods
3 See also
4 Notes
5 External links
Financial analysts often assess the firm's:

1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A
company's degree of profitability is usually based on the income statement, which reports on the company's
results of operations;
2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;
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Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a
business as of a given point in time.
4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant
losses in the conduct of its business. Assessing a company's stability requires the use of both the income
statement and the balance sheet, as well as other financial and non-financial indicators.
Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):
Past Performance - Across historical time periods for the same firm (the last 5 years for example),
Future Performance - Using historical figures and certain mathematical and statistical techniques,
including present and future values, This extrapolation method is the main source of errors in financial
analysis as past statistics can be poor predictors of future prospects.
Comparative Performance - Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or
the income statement, by another, for example :
n / equity = return on equity
Net income / total assets = return on assets
Stock price / earnings per share = P/E-ratio
Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several
theoretical challenges:
They say little about the firm's prospects in an absolute sense. Their insights about relative
performance require a reference point from other time periods or similar firms.
One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways.
One can partially overcome this problem by combining several related ratios to paint a more
comprehensive picture of the firm's performance.
Seasonal factors may prevent year-end values from being representative. A ratio's values may be
distorted as account balances change from the beginning to the end of an accounting period. Use
average values for such accounts whenever possible.
Financial ratios are no more objective than the accounting methods employed. Changes in accounting
policies or choices can yield drastically different ratio values.
They fail to account for exogenous factors like investor behavior that are not based upon economic
fundamentals of the firm or the general economy (fundamental analysis) [1].
Financial analysts can also use percentage analysis which involves reducing a series of figures as a
percentage of some base amount[2]. For example, a group of items can be expressed as a percentage of net
income. When proportionate changes in the same figure over give time period expressed as a percentage is
know as horizontal analysis[3]. Vertical or common-size analysis, reduces all items on a statement to a
common size as a percentage of some base value which assists in comparability with other companies of
different sizes [4].
Another method is comparative analysis. This provides a better way to determine trends. Comparative
analysis presents the same information for two or more time periods and is presented side-by-side to allow
for easy analysis.[5].
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Business valuation
Fundamental analysis
1. ^ Financial Ratios (http://www.netmba.com/finance/financial/ratios/)

2. ^ Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting (12th ed.).
Hoboken, NJ: John Wiley & Sons, p. 1320 ISBN 0-471-74955-9
3. ^ Kieso, et al., 2007, p. 1320
4. ^ Kieso, et al., 2007, p. 1320
5. ^ Kieso, et al., 2007, p. 1319
[1] (http://www.sfaf.com) SFAF - the French Society of Financial Analysts

[2] (http://www.aciia.org) ACIIA - Association of Certified International Investment Analysts
[3] (http://www.effas.com) EFFAS - European Federation of Financial Analysts Societies
Retrieved from "http://en.wikipedia.org/wiki/Financial_analysis"
Categories: Valuation
This page was last modified on 14 December 2009 at 18:29.
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Financial analysis - Wikipedia, the free encyclopedia

From Wikipedia, the free encyclopedia

Financial analysis (also referred to as financial

Financial analysts often assess the firm's:

Financial analysis - Wikipedia, the free encyclopedia

Financial analysis - Wikipedia, the free encyclopedia

1. ^ Financial Ratios (http://www.netmba.com/finance/financial/ratios/)

[1] (http://www.sfaf.com) SFAF - the French Society of Financial Analysts

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