Question

Analysis of historical financial performance and current financial conditions inform operations and future strategies. What factors and financial documents would you review in order to perform a financial performance analysis? How do they inform you?

Answer 1

In order to perform a financial analysis of a particular firm, we'll focus on the following documents and factors:

1. Balance sheet: This document helps us analyze the capital expenditure of the company. The position of asset and liabilities on a balance sheet is viewed. First, we look and analyse of the short-term liquidity of the firm that is generated from current asset and current liability positions or more specifically, the current ratio (CA/CL) and quick ratio [CA-stock-prepaid expenses)/ CL]. We also analyze the source of funds for the functioning of the company, by looking at the long term borrowing and shareholder funds. From this, we compute the debt-equity ratio (long term debt/equity). It helps us in knowing the risk in the business. We even look at non-current assets of the company which includes PPE (Property plant and equipment) and analyze the non-performing assets of the company and also the depreciation rates.

2. Profit and Loss statement: This document helps us analyze the revenue expenditure of the company. It is a position of income and expenditure incurred by the company in one year course of operation. It provides us with a clear picture of sales, expenses (salaries, overheads, selling and distribution etc.) It also gives us a clear picture of interest and tax expenses paid by the company. It provides us information about sources of other income for the company.

3. Cash flow statement: It contain the insights on the cash or bank transactions of the firm. This document contains the data and analysis of the operating, financing and investing activities of the firm and provides the information on cash inflow and outflow for the firm. It gives us a clear picture of how much the company is generating the revenue from its operations. It also helps us in knowing about the cash and cash equivalence position of the firm. It highlights all the major purchases (fixed assets) and also changes in equity shareholding of the firm which might affect the cash or bank balance of the firm.