What is Financial Analysis? And What is the Role of a Financial Analyst?
It's healthy to take stock of your business from time to time, and evaluating the allocation of resources from a business perspective is non-negotiable.
Financial analysis can be elaborately defined as an assessment on, how effective are the investments or funds engaged by the organization or business, to check the efficiency of funds used for operations, and lastly to secure debtors and claims against the business's assets.
Financial analysis is used by a business to evaluate if a unit is steady, solvent, or lucrative enough to go ahead with a financial investment. Financial analysis is also applied to set the financial policies, study economic trends, and eventually build long-term targets and action plans for the business so that it can invest in projects or companies that will get better returns.
All this evaluation is done on the basis of a combination of financial numbers and data, like income statement, balance sheet, and cash flow statement etc…,
One of the most used and trusted methods to analyse financial analysis is by calculating ratios from data, the ratios can be compared against the company's past performance or against those of different companies. A common ratio is ‘Return on Assets’, which is used to analyse how effective a business is at utilizing its assets as a measure of cost-effectiveness.
Financial analysis can be applied in a Corporate or Investment set up like said earlier in Corporate Finance a company’s own past performance, and profit margin, are evaluated with the help of ratios like ‘Net Present Value’ and ‘Internal Rate of Return’. This activity allows forecast in financial budgets and makes the future prediction based on past trends.
In Investment Finance it is an external financial analyst who studies the health by conducting financial analysis specifically for investment purposes. The financial analysis here is done either on a top-down approach or a bottom-up approach, to identify high-performing sectors, where past performances are analysed to calculate future performance indicators on investments.
A Financial Analyst can perform two types of financial analysis,
Technical Analysis, where quantitative charts are looked upon, like ‘Moving Averages’
Fundamental Analysis, here Ratios are analysed, like ‘Company’s Earnings Per Share (EPS)
Financial Analyst is a board term, as they play different roles within different companies and sectors. However, one thing is established, that the role of a Financial Analyst within the financial sector, is the most coveted and revered role. To put it in a nutshell, a financial analyst researches the company fundamentals on a macroeconomic and microeconomic level to give industry recommendations.
They advise and assist in decision-making on charting the path ahead, such as to buy or sell the company stocks based on its past, current and future strength.
Hence needless to say the financial analyst should be well updated on business trends and current developments in the relevant industry. They should also be experts in formulating financial models, which on a number of variables can predict future economic climate.
There are various types of financial analyst positions available in the financial sectors. Financial analysts are sought after by investment banks, and insurance companies, on the buy or the sell-side. Besides these verticals, financial analysts also work in subspecialties, like analysts that specialise in equities, or in fixed income instruments, or maybe they can also specialise in energy or technology.
A career as a financial analyst is very rewarding on the personal and professional front, it needs a lot of preparation and hard work. A financial analyst’s contribution is an integral part of any business landscape.