Last updated on March 26th, 2024 at 12:26 pm
Learn the Financial Analysis of a Company: Understand the Balance Sheet and Income Statement
What is the financial analysis of a company? It is the process of assessing a company's performance in an industrial and capital market environment. With the help of the financial performance data, it is easy to see whether a company is experiencing profit or loss. The information that is yielded by the financial analysis helps shareholders to understand whether the firm is worth investing in or not.
In other words, it tells about how much liquid capital a business possesses. It also reflects its solvency or capability to stay afloat in difficult times. It also tells about the financial flexibility of the organisation and how much money it can circulate in the market. In a nutshell, it is imperative to learn financial analysis.
For financially analysing the performance of an organisation, there are different markers. These indicators are financial statements that are computed keeping several factors in mind. The statements are as follows:
- The balance sheet
- The income statement
- The profit and loss statement
- The operational revenue generation
- Cash flow statement
- Financial ratio analysis
How do balance sheets and income statements help to learn financial analysis?
To decide for a company, you need to analyse the financial statements of a company. These financial statements include the balance sheet, and income and cash flow reports.
The balance sheet reflects the company's assets, the liabilities it has to fulfil and the shareholders' equity. This helps to understand the company's financial worth in terms of the book value. The income statement tells what the company earns and spends. An increase in revenue or gains could increase the stockholders' equity. This helps in the computation of ratios which help assess when a company will be profitable, both in the short and long term. This information helps a company to know whether it is incurring a profit or a loss. It is also helpful to investors for the same reason. In a financial modelling course, you are taught the intricacies of financial statements like the balance sheet and the income statement.
What are the different types of financial statement analysis?
Analysts frequently utilise three methods for analysing the financial statements of a company.
The first technique of analysing a financial statement is the horizontal analysis method. In this technique, a financial analyst compares the historical company data for the previous financial or accounting years. Usually, the horizontal analysis method aims to determine at what rate a company is growing for specific periods.
The second method of analysis is the vertical analysis technique which performs a comparative study of items on a financial statement in connection with each other. For example, an analyst could express an expense item as a company sales percentage.
The third technique of analysis of financial statements is called ratio analysis and it is also a core concept of fundamental equity analysis where you compare the line-item data. There are several examples of ratio analysis like earning per share, price-to-earnings ratio, and dividend yield.
What else does an income statement supply?
The statement of income, or the income statement, gives out data about the net financial results of a company's business activities. These financial results are calculated according to a particular time. This report or the income statement also shows the revenue the company has accrued over time.
It also shows the expenses and losses the company has incurred over a specific time period. This period is generally 12 months or a particular financial year. The basic equation of the income statement is net income = revenue + other sources of income – expenses.
What other information can you get from a balance sheet?
The balance sheet is an important financial report. It helps to disclose various types of information. It tells what resources or assets the company controls. Moreover, it shows the company's liabilities or how much it owes to creditors at the time of its calculation. The owners' equity is a portion of the net assets that the company also owns. Therefore, owners have a residual claim on the assets of the company after the subtraction of its liabilities. The relationship amongst the liabilities, assets and equity of the owners is what makes up the balance sheet. It can be derived from the equation: assets = liabilities + equity of the owners.
Hopefully, this write-up has explained how income statements and balance sheets help to understand the finances of a company. If you are planning to enter this field of assessing a company's books and helping others understand its actual situation, then completing financial analyst training is the ideal way to go about the business.
In this regard, you can take the assistance of the Pro-degree in Financial Analysis from KPMG that Imarticus Learning offers.
