Financial analysis is the process of examining a company’s performance in the context of its industry and economic environment. Central focus of financial analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities.
Financial Health Check
Analysis & Benchmark
Fundamental financial analysis starts with the information found in a company’s financial reports (audited, unaudited or management purpose disclosures and reports).
”If you know the enemy
Sun Tzu
and know yourself, you
would not fear the result
of a hundred battles.
Method Overview
This method consists of five main parts of analysis. They are described below in more details:
Financial Statements Structural Analysis
First step is to provide general overview on financial statements structure. This analysis is usually conducted by means of vertical and horizontal analyses. Vertical analysis provides insight on how the balances are composed (each position share in assessed total value). Horizontal analysis is conducted by calculating change indexes, indicating how some positions have changed through time. Outcomes of these analyses may be even presented graphically.
Financial Statements Ratio Analysis
Ratio analysis is a quantitative method of gaining insight into a company’s liquidity, solvency, operational efficiency, and profitability by studying its financial statements (balance sheet and income statement). Ratios are calculated by putting in relation various financial statements positions, and they are usually analyzed in three dimensions: current ratios vs. theoretical limits, current ratios vs. previous periods ratios and current ratios vs. key competitors (market) ratios.
Du Pont Profitability Analysis
DuPont analysis is used to evaluate the component parts of a company’s ROE. This allows an investor to determine what financial activities contribute the most to the changes in ROE. An investor can use tools like this to compare the operational efficiency of two similar firms. Managers can use this analysis to identify strengths or weaknesses that should be addressed.
Working Capital Analysis
Working capital measures company’s operation efficiency and short-term financial health. In this analysis we provide current working capital structural analysis (how the working capital is composed) and working capital development analysis which provides deeper understanding on how working capital is built up and how it changes through periods.
Cash Flow Analysis
This analysis focuses on reconstruction of Cash Flow Statement by means of indirect method which is more suitable for analysis. Outcome of this part of analysis is understanding on how the company generates cash flow from operations, investing and financing.