Financial analysts<\/a> are people who study and help analyse the historical data of a company and make predictions about its future performances.<\/p>\nTypes of Financial Analysis<\/h2>\n
There are various kinds of financial analysis, which are:<\/strong><\/p>\n\n- Vertical Analysis<\/strong>
\nThis is a form of analysis where different components of an income statement are taken into consideration and then segregated on the basis of revenue to express them as a percentage. Results obtained are often compared with that of other companies in a similar industry to get a better overview of the company performance.<\/li>\n- Horizontal Analysis<\/strong>
\nThis form of financial analysis involves the study of extensive financial data gathered over a couple of years which are then compared with each other to determine their rate of growth over time. This helps in understanding whether a certain organisation is growing or falling.<\/li>\n- Leverage Analysis<\/strong>
\nHighly popular among financial analysts, leverage ratios are used in the evaluation of an organisation\u2019s performance. While complete debt is considered as a single financial metric and may not be completely helpful on its own, it can be evaluated against the total equity of a company to understand its complete capital structure.<\/li>\n- Growth Rates<\/strong>
\nAnother big aspect of financial analysis is understanding growth rates and making predictions or projections regarding the same. Here are a couple of examples of how growth rate analysis is conducted:<\/p>\n\u25cf Regression analysis
\n\u25cf Year on year
\n\u25cf Bottom-up analysis
\n\u25cf Top-down analysis<\/li>\n
- Profitability Analysis<\/strong>
\nThis is a variation of an income statement analysis to understand if the economics of any business is in place or not. Here is how profitability analysis is conducted:<\/p>\n\u25cf Net profit margin
\n\u25cf Gross margin
\n\u25cf EBIT margin
\n\u25cf EBITDA margin<\/li>\n
- Liquidity Analysis<\/strong>
\nThis kind of financial analysis depends on the balance sheet of an organisation, mostly to understand if the short term obligations of a company have been met or not. Common methods of liquidity analysis are:<\/p>\n\u25cf Acid test
\n\u25cf Cash ratio
\n\u25cf Current ratio
\n\u25cf Net working capital<\/li>\n
- Efficiency Analysis<\/strong>
\nEfficiency ratios are analysed to understand if an organisation can manage its assets well and effectively use them in cash flow and revenue generation. Most efficiency ratios are:<\/p>\n\u25cf Cash conversion ratio
\n\u25cf Inventory turnover ratio
\n\u25cf Asset turnover ratio
\n\u25cf Fixed asset turnover ratio<\/li>\n
- Cash Flow Analysis <\/strong>
\nAny organisation\u2019s ability to generate cash flow is one of the most crucial factors in the field of finance. Analysts usually start from the cash flow statement to understand the operating procedure of any company including their investing histories and finance activities. Common cash flow analysis methods are:<\/p>\n\u25cf Free cash flow
\n\u25cf Operating cash flow
\n\u25cf Free cash flow to the equity
\n\u25cf Free cash flow to the firm<\/li>\n
- Return Rates<\/strong>
\nAnalysing return on investment (ROI) is very crucial in the finance sector since investors are always concerned about the rate of return they can earn on the money they have invested. Common rates of return analysis include:<\/p>\n\u25cf Return on assets
\n\u25cf Return on equity
\n\u25cf Return on invested capital
\n\u25cf Capital gain
\n\u25cf Dividend yield
\n\u25cf Internal rate of return
\n\u25cf Accounting rate of return<\/li>\n
- Valuation Analysis<\/strong>
\nThe valuation of a business is an important part of financial analysis; financial analysts often spend time building financial models to understand this. There are quite a few approaches for valuation analysis, which can be:
\n\u25cf Market approach of relative value
\n\u2756 Precedent transactions
\n\u2756 Comparable company analysis
\n\u25cf Cost approach
\n\u2756 The cost of building or replacing
\n\u25cf Intrinsic value
\n\u2756 Discounted cash flow analysis<\/li>\n- Sensitivity and Scenario Analysis<\/strong>
\nRisk measurement of any business is conducted by the method of sensitivity and scenario analysis during financial modeling. This procedure is to value and predict the future of a company. Performing a sensitivity test could help understand if the future of a company might be at stake, which is why financial planning and analysis is essential. This also helps an organisation prepare budgets and make future predictions.<\/li>\n- Variance Analysis<\/strong>
\nA form of financial analysis, it is the method of comparing the budget or a forecast to the actual projections or results. Variance analysis is important for the finance and accounts departments of a company since it helps in budgeting, internal planning, and operations.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"Financial analysis is the use of financial data and information to evaluate the performance of a company and come up with strategies and recommendations as to how to improve its operations. Financial analysts are people who study and help analyse the historical data of a company and make predictions about its future performances. Types of […]<\/p>\n","protected":false},"author":1,"featured_media":240547,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[22],"tags":[88,102],"class_list":["post-240544","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-financial-analysis","tag-financial-analyst"],"acf":[],"aioseo_notices":[],"modified_by":"Imarticus Learning","_links":{"self":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/240544","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/comments?post=240544"}],"version-history":[{"count":0,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/240544\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/media\/240547"}],"wp:attachment":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/media?parent=240544"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/categories?post=240544"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/tags?post=240544"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}