FACTOID # 25: If you're tired of sitting in traffic on your way to work, move to North Dakota.
 
 Home   Encyclopedia   Statistics   States A-Z   Flags   Maps   FAQ   About 
   
 
WHAT'S NEW
 

SEARCH ALL

FACTS & STATISTICS    Advanced view

Search encyclopedia, statistics and forums:

 

 

(* = Graphable)

 

 


Encyclopedia > Financial analysis

Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project. Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business. ... A project is a temporary endeavor undertaken to create a unique product or service. ...


It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their basis in making business decisions. Based on these reports, management may: Historical financial statement Financial statements (or financial reports) are formal records of a business financial activities. ...

  • Continue or discontinue its main operation or part of its business;
  • Make or purchase certain materials in the manufacture of its product;
  • Acquire or rent/lease certain machineries and equipments in the production of its goods;
  • Issue stocks or negotiate for a bank loan to increase its working capital.
  • other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

Contents

The stocks are a device used since medieval times for public humiliation, corporal punishment, and torture. ... A loan is a type of debt. ... Working capital is a valuation metric that is calculated as current assets minus current liabilities. ...

Goals

Financial analysts often assess the firm's:


1. Profitability- its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations; Income statements is a financial statement for companies that indicates how net revenue (money received from the sale of products and services before expenses are taken out, also known as the top line) is transformed into net income (the result after all revenues and expenses have been accounted for, also...


2. Solvency- its ability to pay its obligation to debtors and other third parties in the long-term;
3. Liquidity- its ability to maintain positive cash flow, while satisfying immediate obligations; In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. ...


Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a fiscal year. ...


4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.


Methods

Financial analysts often compare financial ratios (of solvency, profitability, growth...): A financial ratio is a ratio of two numbers of reported levels or flows of a company. ... In finance solvency is the ability of an entity to pay its debts with available cash. ... Profit is what is gained, after costs are accounted for. ...

  • Past Performance: Across historical time periods for the same firm (the last 5 years for example),
  • Future Performance: Using historical figures and certain mathematical and statistical tehcniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics are poor predictors of future prospects.
  • Comparative Performance: Comparison between similar firms.

These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example : In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a fiscal year. ... Income statements is a financial statement for companies that indicates how net revenue (money received from the sale of products and services before expenses are taken out, also known as the top line) is transformed into net income (the result after all revenues and expenses have been accounted for, also...

Net profit / equity = return on equity
Gross profit / balance sheet total = return on assets
Stock price / earnings per share = P/E-ratio

Comparing financial ratios are merely one way of conducting financial analysis. Financial ratios face several theoretical challenges: Gross profit or sales profit or gross operating profit is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. ...

  • They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.
  • One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance.
  • Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.
  • Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.
  • They fail to account for exogenous factors like investor behavior that are not based upon economic fundamentals of the firm or the general economy (fundamental analysis) [1].

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. ...

See also

A business valuation determines the price that a hypothetical buyer would pay for a business under a given set of circumstances. ... Definition Fair value, also called fair price, is a concept used in finance and economics. ... Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. ... Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ... It has been suggested that this article or section be merged into Fundamental analysis. ... Categories: Possible copyright violations ...

Ratios

In finance, the PE ratio of a stock (also called its earnings multiple, just multiple, or P/E) is used to measure how cheap or expensive share prices are. ... In finance, a PEG ratio is a financial ratio of a company. ...

Notes

  1. ^ http://www.netmba.com/finance/financial/ratios/

External links

  • ProfitCents - This site provides financial analysis tools to convert complex financial data into plain language and understandable analysis.
  • Financial ratios - This site describes the Purposes and Limitations of Ratios and Financial Analysis.
  • "Financial Analysis" - This site provides analyses tools to conduct financial ratios analysis instantly.

  Results from FactBites:
 
Financial Analysis / Industry Analysis / Accounting Ratios (282 words)
Instant accounting ratios financial analysis and financial statement analysis, in any currency, with industry ratios tools and accounting ratios comparisons: 5-year ratio analysis - No software to install - Excel format - 28 most applicable financial ratios - Altman Z Score bankurptcy prediction - Growth rate prediction.
Whether you are a student or a recognized professional, your MBA is your financial analysis partner.
For accounting ratio analysis, industry ratios analysis and analyzing investment opportunities, our mission is to assist you in researching financial ratios, achieving your monetary goals; minimizing your inherent risk of loss, while increasing your potential for success.
Financial Statement Analysis Software by ECI. (846 words)
Financial statement analysis is the evaluation of a firm's financial statements in order to assess the firm's worth and its ability to meet its financial obligations.
A general financial statement analysis "rule of thumb" is that a business should exhibit an ability to handle a 5% decline in revenue, a 5% increase in expenses and a 3% increase in variable interest rates.
In agricultural financial statement analysis, the Farm Financial Standards Council recommends net farm income and three ratios be measured: return on assets, return on equity, and operating profit margin.
  More results at FactBites »

 
 

COMMENTARY     


Share your thoughts, questions and commentary here
Your name
Your comments

Want to know more?
Search encyclopedia, statistics and forums:

 


Press Releases |  Feeds | Contact
The Wikipedia article included on this page is licensed under the GFDL.
Images may be subject to relevant owners' copyright.
All other elements are (c) copyright NationMaster.com 2003-5. All Rights Reserved.
Usage implies agreement with terms, 1022, m