Question

In: Finance

Discuss in brief the various financial analysis techniques. Ensure to make clear the description of the...

Discuss in brief the various financial analysis techniques. Ensure to make clear the description of the major liquidity ratios and the major solvency ratios

Solutions

Expert Solution

Financial Analysis - Financial analysis is useful tool in evaluating a companies performance and trends. The source of data is the companies annual report, Financial statement.

for analysing financial, techniques such as Ratios, Common size analysis, Graphs, Regression analysis helps in evaluating company performance.

1. Ratio Analysis : A ratio is an indicator of some aspect of company performance like profitability or inventory management that tells us what happened but not why it happened.

Ratios allow us to evaluate :

  • Operational efficiency
  • financial flexibility
  • changes in company overtime
  • company performance relative to industry

Ratios are grouped into following catagories:

  • Liquidity Ratio
  • Leverage Ratio
  • Efficiency Ratio
  • profitability Ratio
  • Market Value Ratio

Liquidity Ratio : Ratios that measures a company ability to repay both short term and long term obligations. Major Liquidity Ratios includes Current Ratios, Acid Test Ratio, Cash Ratio, Operating Cash Flow Ratios

  1. Current ratios measures the ability to pay off short term liabilities with current assets ( Current Assets/Current Liabilities)
  2. Acid Test Ratio measure the company ability to pay off short term liablities with quik assets ( (CurrentAsset- Inventories/current liabilities)
  3. Cash Ratios measure the company ability to pay off short liablities with cash and cash equivalents ( Cash and cah equivalents/ current liabilities)

Leverage Ratios : Also known as Solvency ratios that determines the company ability to service its debt. Majar Solvency Ratios include Debt Ratios, Debt to equity ratio, Interest coverage ratio, Debt service coverage ratios

  1. Debt Ratio measures the relative amount of companys asset that are provided from debt (Total Liabilities/ Total Asset)
  2. Debt to equity ratios calculates the weight of total debt and financial liabilities agaianst shareholders equity ( Total Liabilities/ Shareholders equity)
  3. Interest coverage ratios shows how easily a company can pay its interest expenses ( Operating Income/ Interest Expenses)
  4. Debt service coverage ratios reveals how easily a company can pay its debt obligations ( Operating Income/Total debt Service)

Efficiency Ratios : Also known as Activity financial ratios and used to measure how well a company is utilizing its assets and resources. Common efficiency ratios include Asset turnover Ratio, Inventory Turnover Ratio, Inventories turnover ratios.

Profitability Ratios : it measure comapny ability to generate income relative to revenue , Balance sheet asset , Operating assets, equity.

Market Value Ratios : Market value ratios are used to evaluate the share price of a company stock .

2. Common size analysis : Common size financial statement are used to compare the performance of different companies within an industry or a company performance over time. Common size statements are prepared by expressing every item in a financial statement as % of base item.

3. Use of Graphs : Graphs can be considered to analyse financials. It is a pictorial representation of the analysis done either a ratio analysis or trend analysis. Analyst use appropriate graphs such as line charts or bar graphs based on type of data to be shown. This helps in quick comparison of financial performance and structure overtime.

4. Regression Analysis : This analysis can be used to describe the relationship between a set of independent variables and dependent variables . Regression analysis produces a equation where the coefficients represents the relationship between each independent variable and dependent variable.


Related Solutions

Give a brief idea how you make analysis of Variances. Elaborate on the various Causes of...
Give a brief idea how you make analysis of Variances. Elaborate on the various Causes of Variances and justify whether specific variances should or should not be investigated
B. Please read the brief description and respond to the questions. Please be clear and specific....
B. Please read the brief description and respond to the questions. Please be clear and specific. Check your work as this is not an easy problem. Situation: A small Canadian company has contracted to purchase 200,000 toys for 3.50 British pounds each, from a British company. The Canadians have agreed to pay for the toys in British pound sterling. The Canadians have also agreed to sell the toys to a U.S. company for USD$ 5.50 per toy. The Canadian company...
A description and example of four qualitative data analysis techniques
A description and example of four qualitative data analysis techniques
Discuss the various categories of financial ratios used in financial statement analysis. Provide at least two...
Discuss the various categories of financial ratios used in financial statement analysis. Provide at least two examples of each type of ratio and discuss what the particular ratio tells us about the performance of a company. (Essay question)
Business Cycle: Description of model and phases and brief explanation of Policies implemented during the various...
Business Cycle: Description of model and phases and brief explanation of Policies implemented during the various phases.
In this discussion question, you will discuss financial statement analysis: What are the various ways you...
In this discussion question, you will discuss financial statement analysis: What are the various ways you can analyze financial statements? Hint: Vertical and common-sized are the same thing. Which method do you believe is used most often internally? Why? Which method do you believe is used most often by external stakeholders? Why? Of the different general types of ratios, liquidity, solvency, profitability, etc., which do you think are the most useful by the various stakeholders? Why?
explain the purpose of financial statement analysis, describe the primary techniques used in financial statement analysis,...
explain the purpose of financial statement analysis, describe the primary techniques used in financial statement analysis, and finally, discuss the problems associated with financial statement analysis.
Module 8: Financial Statement Analysis explain the purpose of financial statement analysis, describe the primary techniques...
Module 8: Financial Statement Analysis explain the purpose of financial statement analysis, describe the primary techniques used in financial statement analysis, and finally, discuss the problems associated with financial statement analysis. Write a minimum of 300 and a maximum of 350 words.
Capital Investment Analysis List the various capital analysis techniques. Which one do you feel is the...
Capital Investment Analysis List the various capital analysis techniques. Which one do you feel is the most useful for making a capital budgeting decision? Explain your decision.
Make a list of 10 national Christian-owned companies. Include a brief description of the business and...
Make a list of 10 national Christian-owned companies. Include a brief description of the business and HQ location.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT