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WHAT IS FINANCIAL STATEMENT ANALYSIS?

Financial Statement Analysis is usually done to identify key trends over a certain time perios. This is usually done to gain a better understanding of the company performance. Trends are analyzed in the different financial statement components such as the gross profit, net profit, accounts recievables, accounts payables, debt, revenues and cash transactions.

The relative relationship among the different accounts in the financial statements is analyzed through different available ratios. Different ratios are calculated for different purposes. For example current ratio is calculated to evaluate the cash available to pay off immediate category of liabilities.

Financial Statement Analysis is usually aimed for users of financial statements. Different users of financial statements want different information. They are :

Creditors of the company:

The creditors of the company are lenders of debt to a company. They want to know if the company has the ability to pay back its debt. They will use the financial statement analysis to get the information that is concerned to them.

Investors of the company:

 The investors are interested in the Financial Statement Analysis to find out if the company has the ability to generate cash and pay off dividends to the investors.

Management of the company:

The investors are interested in knowing how the management of the company is performing. In order to evaluate the performance of the management to evaluate how they are doing, the investors would need financial statement analysis. The investors would take decisions regarding management after evaluating their performance.

Regulatory authorities of the company:

The financial statements of the company are analyzed by distinct regulatory authorities. These regulatory authorities evaluate if the company conform to ethical guidelines and whether they are following different accounting standards, i.e IFRS, IAS etc.

Different Techniques of Conducting Financial Statement Analysis:

Financial Statement Analysis is carried out through mainly two different ways:

  • Horizontal Analysis
  • Vertical Anlysis

Horizontal Analysis is carried out by comparing financial information of different period. Vertical Analysis on the other hand compares different line items of the financial statements of the company with other items. While comparing them an analyzer would look for variations in earnings or costs of different items over a period of time.

There are several categories of ratios for evaluating the performance of the company.

LIQUIDITY RATIO’S:

The liquidity ratios of the company are essential because they evaluate if the company can sustain or continue to operate in the long run.

CASH COVERAGE RATIO:

The cash coverage ratio of a company finds out the amount of cash available to a company to pay off its interest expense.

Current Ratio:

 The current ratio is usually calculated in order to cover the short term liabilities of the company.

Quick Ratio: There is no major difference between a quick ratio and a current ratio. A quick ratio deducts inventory from Current assets.

Liquidity Index:

Used to calculate the time required to transform assets into cash.

ACTIVITY RATIO’s:

This ratio is used to find out the efficiency level of the company. How well a company is consuming and exploiting its assets.

Accounts Payable Turnover Ratio:

It calculates the speed with which a business payback its suppliers.

Accounts Receivable Turnover Ratio:

This ratio calculates the speed with which a company recovers its money from its debtors.

Fixed Assets Turnover Ratio:

This ratio calculates the amount of sales that a company is able to generate from some fixed assets.

Inventory Turnover Ratio:

This case scenario measures the level of inventory required to support a given level of sales.

Sales to Working Ratio:

This ratio helps to find out the level of sales from working capital.

LEVERAGE RATIO’s:

This ratio tells the amount to which the company is reliant to finance its operations and also the company’s ability to pay back those debts.

DEBT TO EQUITY RATIO:

This ratio tells the extent to which the company is willing to use its debt to run operations instead of utilizing equity.

DEBT SERVICE COVERAGE RATIO:

This shows the company’s ability to pay its debts.

 PROFITABILITY RATIOS:

This ratio is utilized to find out how well a company performs in order to earn profits.

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Posted on July 12, 2016 in Uncategorized

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