In: Finance
Discuss in brief the various financial analysis techniques. Ensure to make clear the description of the major liquidity ratios and the major solvency ratios
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 :
Ratios are grouped into following catagories:
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
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
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.