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What is financial analysis?
It is a process of evaluating a business, budgets, projects, and other finance-related transactions. This is done to determine their stability and performance.
The expertise necessary for understanding and handling successful business is to understand and have proficiency in the language of business. That is the capacity to be able to comprehend any financial information and also display financial data through financial reports.
It is very important in a business to be able to comprehend financial information. The goals of a business are represented in financial terms and a business manager should be able to comprehend them.
Finance also incorporates examining the data enclosed inside financial statements with the aim to facilitate valuable information to aid in management decisions.
Financial analysis is an aspect of an overall role in finance. A company’s accounts and statements have a great deal of information and it is extremely important to read the information correctly. Exploring the full understanding of the statements is at the heart of financial analysis.
What is Financial Analysis?
The purpose of financial analysis is financial policymaking for the long term, evaluating economic trends, evaluating the business as well as whole understanding profitability, the strength of earning potential, and sustainability as well.
Financial reports analysis also implies also the understanding of different business decision-making. It also includes assessment, observation, forecasting, and also the formulation of diagnosis of all processes summarised within the financial statement.
Financial analysis is essential in commercial operations as it facilitates insight into the health and capacity of an organization in the coming days. It provides data to lenders and investors which in turn affects the price of stocks. This information also helps managers to measure their performance in terms of the growth of the company.
Financial analysis is essential to shedding light on the strengths as well as weaknesses which in turn impact the competitiveness of a company.
There are a number of ways to analyze financial data, one could be calculating the ratio from financial statements and comparing the data with historical data of an organization or competitors’ companies.
Types of financial analysis
There are two types of financial analysis
1. Fundamental Analysis:
The fundamental analysis gives one a perspective of a company’s fundamental value. It is done by examining related economic and financial factors.
Macroeconomic factors like environmental factors and state policies supporting industries to microeconomic factors like company’s management are kept in mind as they are major factors that influence security’s value.
- This technique gives you a better insight to identify companies for long-term investment and create wealth as well.
- This technique used by analysts is to find a stock that is currently trading at under value or over value, and this helps them to decide a fair market value of the stock. This is done to help the investors make investment decisions.
For example, if a stock is at a higher value than its fair market value, meaning if the stock is overrated in the current market then analysts recommend selling the stock.
Types of Fundamental Analysis
Fundamental Analysis can be divided into two broad categories.
a). Qualitative analysis
The quality of a company’s executive, brand name, vision, patent, proprietary information, and technology is included in the qualitative analysis. It is generally related to the standard of organization and nature of a business in place of sticking to its quantity.
b). Quantitative analysis
The quantitative analysis gives us an understanding of a company’s financial statement which gives us an insight into the performance better before making investment decisions. Income statements, cash flow statements, and balance sheets are three different financial statements used for quantitative analysis.
2. Technical Analysis:
Evaluation of investment opportunities by analyzing past statistical trends such as price and volume is done by a technical analyst. They assume that stocks are likely to follow their past trends rather than move strangely.
When it comes to the stock market, everything is depending on the market psychology or market emotions. Technical analysts use previous data to analyze these emotions to better understand trends that influence stocks.
Technical analysts believe that previous data trends repeat themselves, like history repeating itself and one can understand better the opportunities to invest by studying the past pattern and trends.
However, to make an effective market strategy both fundamental analysis, as well as technical analysis, are needed.
If you are looking for courses you can find a number of universities that are giving financial analyst courses online. You can opt for them whenever you can and get a degree or certification.
How is a financial analysis used?
1. Corporate financial analysis:
This type of analysis is done by the company’s internal analyst like the accounting department and the report is shared with the management to make better decisions.
2. Investment financial analysis:
This method of analysis is done by an external analyst for investment purposes. Generally, two approaches are there, that is top-down or bottom-up methods.
Key elements of financial analysis are as follows :
- Income statement
The income statement shows a company’s performance taking into consideration the financial gains and business profitability. Analysts use this report to predict the company’s future performance as well as the potential cash flow of business.
- Balance sheet
A balance sheet is a company’s financial statement. It shows a company’s assets and liabilities, it also shows what a company owes and owns. It also shows the amount an investor invested.
- Cash Flow Statement
All kinds of cash flow reports of any company, be it inflow or outflow which a company receives from external investment earnings, from operations, earnings to spend for business events and activities, and other investments.
Financial analysis in the current scenario is thought to be very essential in any business operation without which a business cannot run properly. It establishes the health and stability of a company. It also facilitates the smooth running of all the activities in a company.
To effectively learn about financial analysis, you can also go for financial valuation courses which are being offered by different institutes and universities.