Financial Analysis

Reviewed by Sujaini | Updated on Sep 30, 2020

What is Financial Analysis?

Financial analysis is the method of reviewing companies, programs, expenditures, and other activities relevant to finance to assess their performance and appropriateness. Financial analysis is usually used to determine whether an enterprise is sufficiently stable, solvent, liquid, or competitive to warrant a monetary investment.

Analysing Financial Analysis

Financial analysis is used to assess economic trends, set monetary policies, build long-term business activity plans, and identify investment projects or companies. This is achieved using the financial numbers and data synthesis. A financial analyst must scrutinise the financial statements of a company—the statement of income, the balance sheet, and the statement of cash flow.

One of the most common methods of evaluating financial data is to derive ratios from the data in the financial statements to be compared with those of other firms or against the past output of the company itself.

Return on assets (ROA), for example, is a standard ratio used to determine how efficient a business is in using its assets and as a measure of profitability. For several companies in the same industry, this ratio could be calculated and compared with each other as part of the more significant analysis.

Corporate Financial Analysis

For corporate finance, the accounting department performs the research internally and shares it with management to enhance company decision-making. This form of internal analysis can involve ratios, such as Net Present Value (NPV) and Internal Return Rate (IRR), to identify projects worth carrying out.

Several companies are extending credit to their customers. As a consequence, the cash refund from sales could be postponed for some time. This is helpful for businesses with large receivable balances to track unpaid days of sales (DSO), which helps the company determine the amount of time it takes to convert a credit transaction into cash.

Related Terms

  • Statutory Audit

    A statutory audit is a legally required check of the accuracy of the financial statements and records of a company or government.   Read more

  • Revaluation Reserve

    Revaluation fund is the accounting term utilised when a business establishes a line item on the balance sheet for the purpose of maintaining a contingency account connected to other assets.   Read more

  • Inflation Accounting

    Inflation accounting is a unique method used to weigh on the published statistics of multinational firms in the effects of soaring or plummeting prices of products in some areas of the world.   Read more

  • Operating Revenue

    Operating revenue refers to the revenue generated by a company from its primary activities.   Read more

  • Escalator Clause

    An escalator clause is also known as an escalation clause, where the provision allows for an automatic increase in the wages or prices.   Read more

  • Agency Problem

    The agency problem is a scenario of a conflict of interest which is inherent in all relations wherein one party is anticipated to operate in the best interests of another party.   Read more

Recent Terms

  • Amortisation

    Amortisation is an accounting strategy used to regularly reduce a loan's book value or an intangible asset's book value over a given period of time.   Read more

  • Rationalisation

    The reorganisation of a firm with the view of enhancing the efficiency of the operation is referred to as the rationalisation.   Read more

  • Profit Centre

    A profit centre refers to a branch, unit, or division of a company which directly adds or which normally adds to the bottom-line or profits of the company as a whole.   Read more

  • Authorised Share Capital

    Authorised share capital is the number of stock units (shares) that a company may issue, as set out in its association memorandum or incorporation papers.   Read more