FINANCIAL ANALYSIS
Balance Sheet
Statement of Income
Origin and Applications of Funds
Financial Reasons
We know that the balance sheet is structured in two parts, assets and liabilities.
The liability represents the financing means available to the company, both its own and those of third parties, while the asset indicates in which assets and rights said means have been invested.
Fixed assets or immobilized. It includes those values that will remain in a durable way in the company. These can be material or tangible, such as buildings, facilities, machinery, transport elements, utensils, etc., or immaterial or intangible, such as the brand name, computer advertising, research and development expenses, etc.
Current assets. It includes those goods or rights that are subject to a constant renewal process, closely linked to the company's own activity.
- Available. Made up of cash and bank balances. - Achievable. The existence of raw materials, product in process of manufacture, product or commercial merchandise and the balances pending collection.
The passive. Based on the criterion of enforceability, liabilities can be classified as follows: • Own funds. They are those assets contributed directly by the owners of the company and the undistributed profits that may or may not take the form of reserves. • Long-term foreign capital. Funds received from third parties whose enforceability is not immediate. • Current liabilities. Made up of suppliers, various creditors and customer advances, and short-term loans or credits.
The sale of fixed or immobilized assets, in turn, can put the operating capacity of the company in trouble, diminish its productive or commercial capacity and lead it to an imbalance that can slowly lead to its disappearance.
On the one hand we can study the proportion between two values, which leads us to a structural approach, on the other we can check its evolution over time, which leads us to an evaluation of the company's own assets.
In the case of the so-called structural ratios, we find a static analysis, while the asset analysis indices have a dynamic character.
This type of analysis aims to determine what the framework in the company is to face the future.
Indices to evaluate profitability: Return on equity, Return on equity capital, Return on invested capital.
The analysis of the profitability of total assets would be: ‰ Return on total assets, ‰ Profit margins on sales, ‰ Turnover of total assets.
The balance sheets of a company have, from the point of view of information, an eminently static character. In other words, it is an accounting statement that presents the financial and equity situation as of a certain date and, therefore, does not report on the variations that may have occurred during the year.
To simplify the comparison and broaden understanding, an accounting method has been developed that, based on two balance sheets, allows us to delve into the subject. This type of state has been called a financing chart, study of sources and uses, sources and employment, and, more generally, state of origin and application of funds, which is the term that we will use from now on.
To meet financing needs, the company has a series of resources that, firstly, we can classify between its own and those of others.
Among our own, we can talk about the benefits obtained from the company's own economic activity and that they have not been distributed as dividends or distribution of benefits among the partners.
Foreign resources can be segregated into two large types, first those that come from long-term indebtedness, (either by issuing obligations or by financing investments with long-term credit loans); on the other hand, any type of increase in short-term or current liabilities.
These amounts of undistributed profits take the name of reserves.
Own resources are made up of capital increases, that is, new contributions from shareholders or partners of the company.
To assess the financial condition and performance of a business, the financial analyst needs to verify various aspects of the financial health of a business.
One of the tools frequently used to make these verifications is a financial ratio or index, which relates two elements of financial information to each other by dividing one amount by the other.
Why use a reason? Why not just look at the numbers themselves? We calculate the ratios because this way we get a comparison that can be more useful than the numbers themselves.
Internal comparisons. The analysis of financial ratios includes two types of comparisons. First, the analyst must compare a current ratio with previous ratios and those expected in the future for the same company.
In summary, it is not so much a ratio of interest at a given time, but that ratio over time, financial ratios can also be calculated for projected statements, or pro forma, and compared with current and previous ratios.
The second method of comparison involves comparing the ratios of a company with those of similar companies or with industry averages at the same point in time.
The analysis has to be in relation to the type of business the company is engaged in and to the company itself, the true test of liquidity is whether the company has the ability to pay its bills on time.
The first summarizes some aspect of the financial condition of the company at a point in time, the moment when the balance sheet has been prepared.
The second kind of ratio summarizes some aspect of the company's performance over a period, usually a year.
TYPES OF REASONS: BALANCE SHEET REASONS, DYNAMIC REASONS AND STATICODYNAMIC REASONS.