Financial analysis
Defination
Financial analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent infomation, to assist in investment and financial decision making.
Purpose
Internally
Externally
Financial analysis is used internally to evaluation issues such as employee performance, the efficiency of operations, and credit policies
Financial analysis is used externally to evaluate potential investments and the credit-worthiness of borrowers, among other things.
Source of data
Financial statement data
Market data
Economic data
Financial statement data is provided by the company in its annual reports and require disclosures
Market data such as the market price of securities is found in the financial press and the electricity media daily
Economic data: GDP,CPI available from government and private sources.
Financial ratios
Classification
By construction
A coverage ratio
A return ratio
A turnover ratio
Is a mesure of a company's ability to satisfy particular obligation
A component percentage
Is a measure of the net benefit, relative to the resources expended
Is a measure of the gross benefit, ralative to the resources expended
Is the ratio of a component of an item to the item
By characteristics
A liquidity ration
A profitability ratio
An activity ratio
A financial leverage ratio
A shareholder ratio
A return on investment ratio
provides information on a company’s ability to meet its short-term, immediate obligations.
provides information on the amount of income from each dollar of sales.
relates information on a company’s ability to manage its
resources (that is, its assets) efficiently.
provides information on the degree of a company’s
fixed financing obligations and its ability to satisfy these financing obligations.
describes the company’s financial condition in terms of
amounts per share of stock.
provides information on the amount of profit,
relative to the assets employed to produce that profit.
What is a ratio
A ratio is a mathermatical relation between one quantity and another
Current ratio
Current ratio is the comparision between current assets and current liabilities
Financial ratios
Financial ratio is a comparision between one bit of financial information and another.