Financial Analysis

Financial analysis can be considered as a set of activities which goal is to identify and complexly evaluate financial situation of a business. Financial analysis should recognize the health of the business, reveal its weaknesses, which could become in the future a threat for the business, and identify its strengths that the business could use in the future as an opportunity.

Financial analysis is based primarly on past data, but it is primarily a basis for decisions about future.

Financial analysis evaluates the business as a whole and in all factors that affect its financial situation. Specifically:

• Short-term financial situation - solvency horizon of 1 year
• Long-term financial situation - ability to pay long-term liabilites
• Effective business operation

Financial analysis users

Information related to business financial condition is important both for business managers, but also for other subjects. Financial analysis user can be divided into external and internal:

• External users:
  • Banks, creditors
  • Investors
  • Competitors
  • State and its authorities
  • Customers and suppliers
• Internal users:
  • Managers
  • Trade unionists
  • Employees

Inputs to the financial analysis

Basic inputs to the financial analysis are internal information resources supplemented by external resources. Among basic resources belong:

• Financial statements forming a final accounts (balance sheet, profit and loss account) and a supplement to the final accounts.
• Management accounting data
• Business statistics, development forecasts, etc.

Basic financial analysis methods

Among basic methods of financial analysis usually belong:

• Extensive (absolute, status) ratios analysis
  • Horizontal analysis (Trend analysis)
  • Vertical (Percentage) analysis
• Financial funds analysis
  • Net working capital analysis
  • Net current assets analysis
  • Net financial liability analysis
• Ratios analysis
  • Activity ratios analysis
  • Leverage ratios analysis
  • Liquidity ratios analysis
  • Market value ratios analysis
  • Profitability ratios analysis
• Analysis of sets of indicators
• Maths-statistical methods and non-statistical methods

Related terms, methods and analyticalt techniques:

• Activity Ratios
• Expenditures × Expenses
• Extensive (absolute) ratios analysis
• Final accounts × Account closing
• Income × Revenues
• Investment valuation techniques (investment possibilities)
• Leverage Ratios
• Liquidity Ratios
• Market Value Ratios
• Profit categories
• Profitability Ratios

Related management field:

• Economy and Finance

Related profession:

• CFO (Chief Financial Officer)