financial performance analysis assignment

Analyzing Financial Performance: Key Metrics and Techniques

By Editorial Team

Financial performance analysis is a crucial aspect of assessing a company’s financial health and making informed decisions. Key metrics and techniques are used to analyze financial statements and evaluate various aspects of a company’s performance. Financial statement analysis involves reviewing key financial documents such as the balance sheet, income statement, cash flow statement, and annual report. By understanding and analyzing these statements, managers can gain insights into profitability, liquidity, solvency, efficiency, and valuation. This analysis helps in identifying financial KPIs that are essential for tracking, measuring, and analyzing a company’s financial health.

Key Takeaways

• Financial performance analysis is crucial for assessing a company’s financial health.
• Key financial documents such as balance sheets and income statements are analyzed to evaluate various aspects of performance.
• Financial metrics and ratios provide insights into profitability, liquidity, solvency, efficiency, and valuation.
• Tracking and analyzing financial KPIs are essential for measuring and improving financial health.
• Regular analysis of financial performance helps in setting realistic goals and ensuring the success of the company.

Understanding Financial KPIs for Performance Analysis

Financial KPIs, or key performance indicators, are essential metrics in measuring and analyzing a company’s financial health. These KPIs are categorized under profitability, liquidity, efficiency, solvency, and valuation, providing valuable insights into different aspects of the company’s performance. Let’s explore some of the key financial KPIs in each category:

Profitability KPIs

• Gross Profit Margin: This metric measures the percentage of revenue left after deducting the cost of goods sold.
• Net Profit Margin: It represents the net income as a percentage of revenue, showing the company’s overall profitability.

Liquidity KPIs

• Current Ratio: This ratio assesses the company’s ability to meet short-term liabilities by comparing its current assets to current liabilities.
• Quick Ratio: It measures the company’s immediate liquidity by considering only its most liquid assets.

Efficiency KPIs

• Inventory Turnover: This ratio indicates the number of times inventory is sold and replaced within a time period, reflecting how efficiently the company manages its inventory.
• Total Asset Turnover: It shows how efficiently the company utilizes its assets to generate revenue.

Solvency KPIs

• Debt-to-Equity Ratio: This ratio compares a company’s total debt to its shareholders’ equity, providing insights into the company’s long-term debt-paying ability.

Valuation KPIs

• Earnings per Share (EPS): It indicates the company’s profitability on a per-share basis.
• Price-to-Earnings Ratio (P/E Ratio): This ratio compares the company’s stock price to its earnings, helping assess its market value.

Understanding and tracking these financial KPIs can provide valuable insights into a company’s financial performance, aiding in decision-making processes. Let’s continue to the next section to explore how these financial metrics and ratios are analyzed in-depth.

Analyzing Financial Metrics and Ratios

Financial metrics and ratios are essential tools for evaluating a company’s financial performance. These metrics provide valuable insights into various aspects of a company’s operations, including profitability, liquidity, efficiency, solvency, and valuation. By analyzing these metrics and ratios, investors and managers can make informed decisions and assess the financial health of a company.

Profitability Metrics

Profitability metrics gauge a company’s ability to generate profits and measure its overall financial performance. Key profitability metrics include:

Liquidity Ratios

Liquidity ratios assess a company’s ability to meet short-term obligations and measure its short-term financial stability . Key liquidity ratios include:

Efficiency Ratios

Efficiency ratios measure how effectively a company utilizes its resources to generate revenue. These ratios provide insights into the company’s operational efficiency and productivity. Key efficiency ratios include:

Solvency Ratios

Solvency ratios evaluate a company’s ability to meet its long-term financial obligations. These ratios indicate the company’s financial stability and its capacity to repay debts. Key solvency ratios include:

Valuation Ratios

Valuation ratios help investors assess a company’s market value and compare it to its earnings. These ratios play a crucial role in determining whether a stock is overvalued or undervalued. Key valuation ratios include:

Analyzing these financial metrics and ratios provides a comprehensive view of a company’s financial health and aids in making informed decisions. By evaluating a company’s profitability, liquidity, efficiency, solvency, and valuation, investors and managers can gain insights into its financial performance and make sound investment or strategic decisions.

Analyzing financial performance through the use of key metrics, ratios, and financial statement analysis is crucial for assessing a company’s financial health. By understanding and tracking financial KPIs related to profitability, liquidity, efficiency, solvency, and valuation, managers can make informed decisions and contribute to the company’s strategic objectives.

Financial metrics and ratios provide valuable insights into a company’s financial performance and serve as benchmarks against industry standards and competitors. Regular analysis of financial performance helps identify areas for improvement, set realistic goals, and ensure the company’s financial health and long-term success.

By conducting a comprehensive financial health assessment, companies can gain a deeper understanding of their overall financial position , identify potential risks and opportunities, and determine the appropriate strategies to achieve sustainable growth and profitability. The analysis of financial performance plays a vital role in enabling informed decision-making and fostering financial stability within an organization.

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Financial Performance Analysis Report

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Financial Performance Analysis Reports in PDF are valuable tools used by organizations to assess their financial health and make informed decisions. These reports provide a comprehensive overview of an organization’s financial performance, highlighting key metrics and trends. By analyzing financial data and presenting it in a clear and concise format, these reports enable stakeholders to gain insights into the company’s financial standing and make informed decisions. In this article, we will delve into the definition of a Financial Performance Analysis Report and provide a step-by-step guide on how to create one. Additionally, we will address some frequently asked questions and explore the importance of financial performance analysis in today’s business landscape.

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What is Financial Performance Analysis Report?

A Financial Performance Analysis Report is a document that provides an in-depth evaluation of an organization’s financial performance. It encompasses the analysis of various financial statements, such as the income statement, balance sheet, and cash flow statement, to assess the company’s profitability, liquidity, solvency, and overall financial health. This report is crucial for stakeholders, including investors, shareholders, lenders, and management, as it helps them understand the organization’s financial position and make strategic decisions. By examining key financial ratios, trends, and benchmarks, a Financial Performance Analysis Report enables stakeholders to identify areas of strength and weakness, assess performance against industry standards, and evaluate the effectiveness of financial strategies and management practices.

How to Create a Financial Performance Analysis Report

Creating a Financial Performance Analysis Report involves several key steps to ensure accuracy and comprehensiveness. Follow this step-by-step guide to create an effective report:

Step 1: Determine the Scope and Goals

Determine the Scope and Goals

Step 2: Gather Financial Data

Collect the necessary financial statements and data, such as income statements, balance sheets, and cash flow statements, for the designated period. Ensure the accuracy and completeness of the data to obtain reliable analysis results.

Step 3: Calculate Financial Ratios

Calculate key financial ratios, such as profitability ratios (e.g., gross profit margin, net profit margin), liquidity ratios (e.g., current ratio, quick ratio), and solvency ratios (e.g., debt-to-equity ratio, interest coverage ratio). These ratios provide valuable insights into the organization’s financial performance and help compare it with industry benchmarks.

Step 4: Analyze Trends and Variances

Identify trends and variances in financial performance by comparing current and historical data. Look for significant changes or patterns that may impact the organization’s financial health and operational efficiency.

Step 5: Interpret Findings

Analyze the calculated ratios, trends, and variances to interpret the organization’s financial performance. Identify strengths and weaknesses, potential risks, and areas for improvement. Provide clear explanations and supporting evidence for your analysis.

Step 6: Prepare Visual Presentations

Present the findings in a visually appealing and easy-to-understand format. Utilize charts, graphs, and tables to highlight key metrics, trends, and comparisons. Use concise and informative captions to enhance the understanding of the data.

Step 7: Summarize and Provide Recommendations

Summarize the key findings of the analysis, highlighting the organization’s financial strengths and weaknesses. Provide actionable recommendations to improve financial performance based on the analysis results and goals set at the beginning of the report.

What is the difference between an Annual Financial Report and a Financial Performance Analysis Report?

An Annual Financial Report is a comprehensive document that provides a detailed overview of a company’s financial activities and results over a fiscal year. It includes financial statements, notes, and other disclosures required by accounting standards. On the other hand, a Financial Performance Analysis Report focuses specifically on analyzing the financial performance of an organization, providing insights into profitability, liquidity, and solvency.

How does Financial Performance Analysis contribute to effective performance management?

Financial Performance Analysis is a crucial component of performance management. By evaluating financial metrics and trends, organizations can assess their performance against goals, identify areas for improvement, and make informed decisions. It helps align financial strategies with organizational goals and supports the evaluation of the effectiveness of financial management practices.

Why is financial health analysis important for stakeholders?

Financial health analysis provides stakeholders, such as investors, shareholders, and lenders, with critical information about the organization’s financial well-being. It enables stakeholders to evaluate the organization’s ability to generate profits, meet its financial obligations, and sustain long-term growth. This analysis helps stakeholders make informed investment decisions and assess the overall financial risk associated with the organization.

In today’s competitive business landscape, organizations must prioritize financial performance analysis to gain a comprehensive understanding of their financial health. In conclusion , by creating and analyzing Financial Performance Analysis Reports, organizations can assess their profitability, liquidity, and solvency, enabling informed decision-making and strategic planning. These reports provide valuable insights for stakeholders, facilitating effective performance management and supporting the achievement of organizational goals . In an era where financial stability and growth are paramount, harnessing the power of financial performance analysis is key to success.

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How to Write a Financial Analysis Report for Your Business

In this Article

Is your business worth investing in? For most of you, the answer is a definitive 'Yes.' But in the business world, talk is cheap. So if you want to attract investors, you'll need to be able to walk the talk, i.e., put your money where your mouth is. 

There's no better way to do that than with a financial analysis report. After all, numbers don't lie. They're the smoking gun investors need before investing in your business. 

Want to learn how to write a financial analysis report that attracts investors? This article covers six simple steps to follow. But first:

What is a financial analysis report?

A financial analysis report shows the financial performance of your business over a specified period of time, usually on a quarterly or yearly basis. It's like a medical report but for your business's financial health. 

In several countries, financial reporting is a requirement. The Securities and Exchange Commission requires companies to disseminate these digital reports to their shareholders in the United States. In addition, these financial reports are usually made available to the public if they're publicly-listed companies

A financial analysis report is invaluable to both you and your stakeholders. Let's discuss why you need it in the next section.

How does a financial analysis report help?

To make the right financial decisions for your business, you need data. This helps you lay a solid foundation for future performance and economic growth opportunities. 

However, you need to be able to keep track of and make sense of all your financial data. That's where a financial analysis report comes in. It helps you organize, analyze, and paint a clearer picture of your business's cash flow and allows for seamless management of business expenses too.

Aside from those, here are a couple of more reasons why you need a financial analysis report:              

Ensures transparency

A financial analysis report is easy on the eyes. It's a watered-down version of your finances that communicates essential data you need to make financial decisions. 

You ensure the transparency your stakeholders want, too. 

Tracks cash flow

Generally, financial reports help you understand cash inflows and outflows . For example, if you know your affiliate sales and operating expenses, the cost of getting links to increase website traffic , social media marketing campaign expenditure, and the money coming in, you can make better financial decisions. 

The information can help with debt ratios, budgeting, debt-to-asset financial ratio analysis, and calculating profit margins. 

Suggested Reads: 10 Ways to Improve Your Business's Finance Position

Allows for data-driven forecasting

Historical and real-time financial data help create financial models to predict future financial performance. These reports help you identify trends, patterns, and problems. As a result, you can plan for them early enough. 

Simplifies taxation

To create a financial analysis report, you must have all your data in a single document. It becomes easier for you to do your taxes, saves you time, and reduces the chances of making errors. Moreover, it's an official document that the Internal Revenue Service can use to calculate your taxes.

At the end of the day, the goal of a financial report is to provide insight into your organization's finances. Then, using both historical and current data, you can set SMART business goals to make better decisions for future performance. 

Finally, it's essential to consider the ongoing nature of financial analysis and the need for periodic reviews. Implementing a project review process allows you to regularly assess the financial health of your business, identify any emerging trends or issues, and make informed adjustments to your financial strategies. This continuous evaluation ensures that your financial analysis remains up-to-date and relevant, providing you and your stakeholders with accurate insights into your business's performance.

Suggested Reads: 2022 Business Expense Categories Cheat Sheet: Top 15 Tax-Deductible Categories

Benefits of a periodic financial analysis

Financial analysis makes it easy for you to identify the strengths and weaknesses of your business. Using that information will not only help your business grow but also thrive. What's more, doing financial analysis over specific periods helps you stay on top of your game by:

Helping manage debts

A periodic financial analysis includes a financial ratio analysis; specifically, a Liquidity Ratio called the Current Ratio Analysis. The Current Ratio is the sum of all your current assets divided by the sum of your current liabilities. It shows if you're liquid enough to meet your upcoming debts. So, if you aren't, you can adjust your financial strategy the soonest.

Determining profitability

When you perform a periodic financial analysis, you can determine your company's profitability and make regular adjustments. A profitability ratio is a financial metric that can help you cut production costs and boost your bottom line. 

You can use a profitability ratio (featured below) to determine your profit margin on sales, i.e., your gross profit margin. Here's the formula. 

It's your sales revenue minus the total cost of goods sold (COGS) divided by revenue. 

Managing inventory

Another perk of doing financial analysis over a specific period is that it helps you better manage inventory . This way, you ensure it's always enough to meet projected sales. You do this using a financial management ratio called the Inventory Turnover Ratio. 

Calculate the Turnover Ratio by dividing your total sale by your inventory.  

Checking stability and revenue growth 

The results of a periodic financial analysis yield your debt-to-equity ratio, too. It's a financial metric that shows how you've raised capital for your business. You want to check your stability and revenue growth every step of the way to determine whether your business is viable in the long run.

The debt-equity ratio is calculated by dividing your total liabilities by your shareholder's equity. It's usually included when you write a financial analysis report. 

Generally speaking, the higher your debt-equity ratio, the higher the risk, and vice versa. Investors use this financial metric to check your company's stability and ability to raise money to grow. 

Optimizing for growth

Financial analysis over specific periods helps you identify opportunities to optimize operational efficiency for revenue growth. That is, regular annual reports help you spot patterns and trends. This allows you to nip problematic areas in the bud and prepare in advance. 

For instance, you can adjust seasonal sales fluctuations, variable costs, etc. 

How to write a financial analysis report

Now that you understand a financial analysis report's 'what' and 'why,' it's time to look at the 'how.' 

Here's how to write a financial analysis report:          

1. Give an overview of the company

The first section of your financial analysis report is the company overview. Here, you want to highlight the potential of your business. It's pretty much what you do in a business plan . Investors rely on your company overview to understand your competitive edge. 

The question you want to answer here is - is your business worth the investment you're asking for? Think of the introductions in business plans or on Shark Tank to give you a better idea. As a general rule of thumb, you want to use plain language when writing your description.

You want to share, in brief, your history, business model, type of organization, description, etc. You can share what sector you're in as well as the size and scale of your business. 

Featured below is an excellent example of a fictional company's overview.        

Start by reviewing your quarterly or yearly financing activities, financial data, and statements. Then go through published business studies and industry-specific trade journals. 

You should consider adding a snippet about how you compare to the industry average among your competitors. Like a business plan, you want to show potential investors why they should choose you. You can use Porter's Five Forces model to analyze your competition. 

2. Write sales forecast and other vital sections

It pays to be as precise and comprehensive as possible when writing the main content. So, you’ll need to organize your data and, sometimes, make some calculations yourself. For instance, when writing your sales forecast , you need your sales data for the past three years before you organize it in financial reporting software or spreadsheets. Tally the data on a yearly, monthly (for the 1st year), and quarterly (for the last two years) basis. 

You can write this part using a spreadsheet. But feel free to use financial reporting software if spreadsheets aren’t your cup of tea. 

There are other sections you should create for your report’s main body. 

Let’s look at them one by one:

• Expense budget

With your sales forecast in place, it's time to figure out how much it'll cost. When setting up your expense budget , ensure it includes variable costs like your marketing budget and fixed costs like rent. In addition, you'll need to create an estimate for items like interest and taxes. 

• Cash flow statement

A cash flow statement summarizes all the money or its equal coming in (cash inflow) or leaving (cash outflow) a business. To create one, you need historical financial data or project it one year ahead if you're starting. Don't forget your cash flow statement is connected to your invoice.

• Estimate for net profit

Tally your net profit using your sales forecast, expense budget, and cash flow statement data. Your net profit margin is your gross margin less taxes, interest, and expenses. Try and be as precise as possible since this can stand in as your profit and loss (P&L) statement . 

• Estimate for assets and liabilities

Your next step is to calculate your company's net worth. How? By managing your assets and liabilities, i.e., those items that don't appear in your P&L statement. 

To do that, ballpark your monthly cash on hand. That is, equipment, inventory, land, and accounts receivable. Then sum up your liabilities, i.e., outstanding loan debts and accounts payable. 

• Break-even point

The last step in writing a company financial analysis report is calculating your break-even point. That's where your business expenses match your sales volume. Use the formula below to find your three-year sales forecast; this will help you find your break-even point.

Needless to say, if you're operating a profitable business model, then your company's revenue should be higher than your operating expenses. Again, this information helps reassure potential investors of your business' stability and revenue growth potential.  

Refrain from assuming that people know the concepts you'll discuss in your report. Instead, define them in general terms first before you start talking about specifics.

3. Determine the company's valuation

The company valuation part is one of the most critical sections of your financial analysis report. Why? Because it helps potential investors see the value of investing in your company. 

To determine your business' valuation is to find your company's value. You do this by analyzing your company data, including all the data you have discussed. There are three main ways to do it, i.e., using the following: 

• Discounted Cash Flow (DCF) Analysis
• Book Value Analysis
• Relative Value Method

The goal here is to outline your current assets and liabilities. Moreover, the above techniques help you determine your business' stocks and current value. To do this, most accountants or financial officers use insights from and final average accounts of your balance sheet. 

4. Perform risk analysis

Risk analysis helps potential investors see your company's investment potential. That includes both current and future risks. You can start risk analysis by running a SWOT analysis . 

But remember that your SWOT analysis is microscopic. So for the best results in your valuation, combine it with other techniques. For example, doing a PESTLE analysis . Here's a template you can use for that:

A PESTLE analysis gives you more details and offers two main benefits. First, it helps you understand your marketing environment and other macro factors that affect your company's financials. 

5. Include summaries of financial statements

When writing the financial analysis report of a company, you need to include a brief overview of your company's financial statements. To do this, summarize each component of the 3-statement model:

Let's discuss each of them:

Cash flow statement. Potential investors look at your cash flow statement summary for two reasons. One, it lets them see if you make enough money to settle your debts. Two, it helps them decide whether your company is worth investing in.

Income statement . A summary of this does two things. First, it shows you gaps in increasing operating profit by allowing you to boost sales revenue , reduce cost, or both. It's also an income statement showing how effective your strategies are at the start of your financial year.

Balance sheet. The balance sheet shows your debt coverage and asset liquidity in real time. The difference between assets and liabilities gives you the 'owner's equity.' Here's an example of a balance sheet:

Note that summarizing each of these three components doesn't mean just including tables in your report. Instead, explain what the data means in paragraph form, too.  

6. Summarize the entire report 

The last section of the financial analysis report of a company is a summary. You want to share your final views about the company and your opinion on whether it's a profit or loss. That said, be sure to substantiate all your claims. 

That means having evidence containing factual data, financial accounts, and proven financial theories. You can also include the outlook of the company. That is the type of organization, industry trends, economic growth strategies, and how they'll affect the company. 

In conclusion

By now, you should understand the value of a company financial analysis report and how to write one. Not only does it show you the financial health status of a company, but it's also the smoking gun investors look for before investing in any business. 

To any organization, a financial analysis report is a compass to optimize operational efficiency for growth. It is also a crucial part in portfolio management especially when you need to open your business up to other stakeholders.

Summarising, to write a financial analysis report, you need to: 

Write your company overview , sales forecast, and other essential sections. Once those are out of the way, you can perform company valuation and risk analysis. Then, all that's left is to summarize what was discussed. 

Daryl Bush is the Business Development Manager at Authority.Builders . The company helps businesses acquire more customers through improved online search rankings. He has extensive knowledge of SEO and business development.

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Financial Performance

A complete evaluation of a company's overall standing in categories such as assets, liabilities, equity, expenses, revenue, and overall profitability

What is Financial Performance?

Financial performance is a complete evaluation of a company’s overall standing in categories such as assets, liabilities, equity, expenses, revenue, and overall profitability. It is measured through various business-related formulas that allow users to calculate exact details regarding a company’s potential effectiveness.

For internal users, financial performance is examined to determine their respective companies’ well-being and standing, among other benchmarks. For external users, financial performance is analyzed to dictate potential investment opportunities and to determine if a company is worth their while.

Before calculations can be made on certain financial indicators that establish overall performance, a financial statement analysis must occur.

What is Financial Statement Analysis?

Financial statement analysis is a process conducted on organizations by internal and external parties to gain a better understanding of how a company is performing. The process consists of analyzing four critical financial statements in a business.

The four statements that are extensively studied are a company’s balance sheet, income statement, cash flow statement, and annual report.

1. Balance Sheet

In financial statement analysis, an organization’s balance sheet is looked at to determine the operational efficiency of a business.

Firstly, asset analysis is conducted and is primarily focused on more important assets such as cash and cash equivalents, inventory, and PP&E, which help predict future growth.

Next, long-term and short-term liabilities are examined in order to determine if there are any future liquidity problems or debt-repayment that the organization may not be able to cover.

Lastly, a company’s owner’s equity section is inspected, allowing the user to determine the share capital distributed inside and outside of the organization.

2. Income Statement

In financial statement analysis, a business’s income statement is investigated to determine overall present and future profitability.

Examining a company’s previous and current fiscal years income statement enables the user to determine if there is a trend in revenue and expenses, which in turn, shows the potential to increase future profitability.

3. Cash Flow Statement

A cash flow statement is critical in a financial statement analysis in order to identify where the money is generated and spent by the organization.

If one segment of the business is experiencing large outflows, in order to stay viable, the company must be generating inflows through financing or sales of assets.

4. Annual Report

The last statement, the annual report, provides qualitative information which is useful to further analyze a company’s overall operational and financing activities.

The annual report consists of all the statements listed above but adds additional insights and narratives on critical figures within the organization.

The additional insights and narratives within the annual report include an extensive narrative breakdown of the various business segments, benchmarks, and overall growth.

As a whole, financial performance analysis is critical whether it is conducted for internal or external use because it helps determine a business’s potential future growth, structure, effectiveness, and most importantly, performance.

Measuring Financial Performance

Through a financial performance analysis, specific financial formulas and ratios are calculated, which, when compared to historical and industry metrics, provide insight into a company’s financial condition and performance.

When calculating financial performance, there are seven critical ratios that are extensively used in the business world to assist and evaluate a company’s overall performance.

1. Gross Profit Margin

The gross profit margin is a ratio that measures the remaining amount of revenue that is left after deducting the cost of sales.

The ratio is useful because it indicates as a percentage the portion of each sales dollar that can be applied to cover a company’s operating expenses.

2. Working Capital

The working capital measurement is used to determine an organization’s liquid net assets available to fund day-to-day operations.

Determining liquidity in a business is important because it indicates whether a company owns resources that can quickly be converted to cash if needed.

3. Current Ratio

The current ratio is a liquidity ratio that helps a business determine if it owns enough current assets to cover or pay for its current liabilities.

4. Inventory Turnover Ratio

The inventory turnover ratio is an efficiency ratio that is used to measure the number of times a company sells its average inventory in a fiscal year.

The ratio is beneficial because it allows the organization to easily determine if their inventory is in demand, obsolete, or if they are carrying too much.

4. Leverage

Leverage is an equity multiplier that is calculated by a business to illustrate how much debt is actually being used to buy assets.

The leverage multiplier remains at one if all assets are financed by equity, but it begins to increase as more and more debt is used to purchase assets.

5. Return on Assets

Return on assets, as the name suggests, helps an organization determine how well its assets are being employed to become more profitable.

If the assets are not being used effectively, the company’s return on assets sum will be low.

6. Return on Equity

Similar to return on assets, the return on equity is a profitability ratio that is used to analyze the equity effectiveness, which, in turn, earns profits for investors.

A higher return on equity suggests that investors are earning at a much more efficient rate, which is more profitable to the business as a whole.

More Resources

Thank you for reading CFI’s explanation of Financial Performance. To keep learning and advance your career, the following resources will be helpful:

• Analysis of Financial Statements
• Financial Ratios
• Income vs. Revenue vs. Earnings
• Projecting Balance Sheet Line items
• See all accounting resources
• See all capital markets resources

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6 Steps to an Effective Financial Statement Analysis

• By Dubos J. Masson, PhD, CTP, FP&A
• Published: 3/9/2018

(Ed. Note: This article has been updated.)

For any financial professional, it is important to know how to effectively analyze the financial statements of a firm.

This requires an understanding of three key areas:

• The structure of the financial statements.
• The economic characteristics of the industry in which the firm operates.
• The strategies the firm pursues to differentiate itself from its competitors.

There are generally six steps to developing an effective analysis of financial statements.

1. Identify the industry economic characteristics.

First, determine a value chain analysis for the industry—the chain of activities involved in the creation, manufacture and distribution of the firm’s products and/or services. Techniques such as Porter’s Five Forces or analysis of economic attributes are typically used in this step.

2. Identify company strategies.

Next, look at the nature of the product/service being offered by the firm, including the uniqueness of product, level of profit margins, creation of brand loyalty and control of costs. Additionally, factors such as supply chain integration, geographic diversification and industry diversification should be considered.

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3. Assess the quality of the firm’s financial statements.

Review the key financial statements within the context of the relevant accounting standards. In examining balance sheet accounts, issues such as recognition, valuation and classification are keys to proper evaluation. The main question should be whether this balance sheet is a complete representation of the firm’s economic position. When evaluating the income statement, the main point is to properly assess the quality of earnings as a complete representation of the firm’s economic performance. Evaluation of the statement of cash flows helps in understanding the impact of the firm’s liquidity position from its operations, investments and financial activities over the period—in essence, where funds came from, where they went, and how the overall liquidity of the firm was affected.

4. Analyze current profitability and risk.

This is the step where financial professionals can really add value in the evaluation of the firm and its financial statements. The most common analysis tools are key financial statement ratios relating to liquidity, asset management, profitability, debt management/coverage and risk/market valuation. With respect to profitability, there are two broad questions to be asked: how profitable are the operations of the firm relative to its assets—independent of how the firm finances those assets—and how profitable is the firm from the perspective of the equity shareholders. It is also important to learn how to disaggregate return measures into primary impact factors. Lastly, it is critical to analyze any financial statement ratios in a comparative manner, looking at the current ratios in relation to those from earlier periods or relative to other firms or industry averages.

5. Prepare forecasted financial statements.

Although often challenging, financial professionals must make reasonable assumptions about the future of the firm (and its industry) and determine how these assumptions will impact both the cash flows and the funding. This often takes the form of pro-forma financial statements, based on techniques such as the percent of sales approach.

6. Value the firm.

While there are many valuation approaches, the most common is a type of discounted cash flow methodology. These cash flows could be in the form of projected dividends, or more detailed techniques such as free cash flows to either the equity holders or on enterprise basis. Other approaches may include using relative valuation or accounting-based measures such as economic value added.

The next steps

Once the analysis of the firm and its financial statements are completed, there are further questions that must be answered. One of the most critical is: “Can we really trust the numbers that are being provided?” There are many reported instances of accounting irregularities. Whether it is called aggressive accounting, earnings management, or outright fraudulent financial reporting, it is important for the financial professional to understand how these types of manipulations are perpetrated and more importantly, how to detect them.

Dubos J. Masson, PhD, CTP, FP&A is Clinical Associate Professor of Finance for the Kelley School of Business, Indiana University.

Copyright © 2024 Association for Financial Professionals, Inc. All rights reserved.

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How to Level Up Your Financial Performance Analysis 

• Finance tutorials

Zakhar Yung

Jun 28, 2023

A financial performance analysis can be a challenging and complex task due to multiple performance indicators and their types.

However, when you break it down into smaller steps, it becomes easier to manage.

In this article, we’ll walk you step by step into how to automate your analysis of financial performance. We’ll also explain the metrics and types of analysis you should be looking into.

What is a financial performance analysis?

A financial performance analysis is a process of evaluating your company’s financial health. This process is usually repeated and associated with looking at financial statements, current ratios, and other essential metrics. The goal of the financial analysis is to provide valuable insights into your company’s strengths and weaknesses. Also, this should help you focus on making informed business decisions.

The importance of financial performance analysis of a company

If you look at your company’s financial performance analysis, you’ll see that it has multiple benefits for different stakeholders including investors, shareholders, and possible lenders.

It’s crucial to measure your financial performance regularly to:

• Assess profitability: Understand how well you are managing your assets and liabilities in generating revenue and meeting objectives. 
• Evaluate financial health: Keep track of your financial position over a specific period of time so you can be proactive in making business decisions. By assessing overall financial health, stakeholders can have the necessary basis for adjusting the company’s strategy, implementing effective risk management, and more.
• Track business performance : Identify operational efficiency by measuring ROI, and looking at your profitability ratios as well as your liabilities. 
• Facilitate planning and budgeting : Get a complete overview of your financial metrics at any given time so you can make both short-term and long-term decisions. 

Tip: If you want to truly leverage your data don’t only use annual reports once a year. Set up financial reporting dashboards that are automatically updated so you can stay proactive and maintain financial health at different points across the year.

How to evaluate the financial performance of a company 

With a data-driven approach and efficient data management in place, you’ll be all set for conducting an insightful financial performance analysis of your business.

Here’s how to achieve this in five steps.

1. Decide the type of analysis you want to focus on

The first thing you need to do is to determine the type of analysis you want to perform. This is important as it will determine the indicators needed and tell you what data you need.

You might want to focus on your balance sheet data for a liquidity analysis or look at your estimated budget vs the budget spent over a period of time for a variance analysis.

This data might be in your QuickBooks, Xero, or Stripe account or even across multiple spreadsheets.

We will explore the main types of analysis and metrics in the following sections, what you need to remember for now is that the analysis type will determine the data that you need.

2. Make analysis an ongoing process

Before you start exporting data and trying to figure out how to blend it and visualize it for your analysis, you should consider looking at an ongoing approach rather than relying solely on yearly or quarterly performance reports.

Streamlining reporting and monitoring crucial processes can help achieve this. 

This approach provides more accurate and timely analysis of trends, better responsiveness to changes, and continuous decision-making based on data.

3. Implement data automation

Data automation can be a game changer when it comes to implementing an ongoing financial analysis. 

By automating your data flows you eliminate manual data entry, copy-pasting, or manually extracting data on a regular basis, which can be time-consuming and tedious. Not to mention, being prone to human errors.

For example, data in your accounting software is being updated on a regular basis. Updating your reports for analysis manually will mean wasting time. 

But when you automate your data flow, for example, from QuickBooks to BigQuery or to a spreadsheet app, you get instant access to the latest data that is always fresh and analysis-ready.

We have a full step-by-step data automation process example at the end of the article that you can check out.

4. Leverage machine learning (ML) algorithms for analysis and forecasting

To enhance your financial performance data analysis and forecasting, you can use ML algorithms. It enables you to identify patterns and correlations in your data that a human analyst might not be able to see.

For example, in BigQuery, a data warehouse, you can create and execute machine learning algorithms to analyze large sets of your data and identify correlations and patterns. To get started with BigQuery, you will first need to move your data there. You can automate your data flow for manipulation and analysis or simply load it manually.

5. Analyze your data with informative dashboards

If you want to track different metrics and KPIs and make your business decision-making powered by data, you should use dashboards. 

Analyzing data with informative dashboards is all about making your data digestible and insights generating. Specific data represented in a visually appealing way is meant to help you understand large amounts of information. Graphs, charts, or tables on a dashboard make the data easy to comprehend hence facilitate you to identify trends, patterns, and anomalies in financial data.

For example, your may have a revenue dashboard with a line chart to display your company revenue over time. It can also give you the ability to drill down into different income sources, like product vertical or geographical location.

You can create financial dashboards using multiple business intelligence tools such as Looker Studio, Power BI, or Tableau. They provide different customization options to adapt dashboards to the needs of your business. 

Below is an example of a financial performance dashboard . It’s designed in Looker Studio and rests on the data collected from multiple sources. This allows you to have a quick overview of your financial sales performance. 

You must not always visualize your data yourself. The Coupler.io data analytics team is ready to assist you in any complex data visualization or data management task you have. 

Now you understand the value of financial analysis and what you need to perform one. But how do you choose the metrics to track and what type of analysis suits your needs?

In the next sections, we’re going to answer these questions and more. You’ll learn where to get the needed data and how to calculate the most common financial KPIs.

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Coupler.io is an all-in-one data analytics and automation platform designed to close the gap between getting data and using its full potential. Gather, transform, understand, and act on data to make better decisions and drive your business forward!

• Save hours of your time on data analytics by integrating business applications with data warehouses, data visualization tools, or spreadsheets. Enjoy 200+ available integrations!
• Preview, transform, and filter your data before sending it to the destination. Get excited about how easy data analytics can be.
• Access data that is always up to date by enabling refreshing data on a schedule as often as every 15 minutes.
• Visualize your data by loading it to BI tools or exporting it directly to Looker Studio. Making data-driven decisions has never been easier.
• Easily track and improve your business metrics by creating live dashboards on your own or with the help of our experts.

Try Coupler.io today for free and join 700,000+ happy users to accelerate growth with data-driven decisions.

Financial statements for measuring financial performance

A financial statement is a summary-level report that shows your business performance. Businesses typically use four primary types of financial statements: the balance sheet, the income statement, the statement of cash flow, and the annual report. In some cases, instead of the annual report, you can go with the statement of retained earnings.

Some financial statements are available in your accounting software such as QuickBooks. Others need to be created separately using the data from external sources. Let’s check out each of these financial statements:

• Balance sheet: an overview of your company’s financial position at a specific point in time. A balance sheet typically includes information about assets, liabilities, liquidity, and equity.
• Income statement: a report of your company’s revenues, expenses, and net income. Income statements are usually generated for a specific period of time, like a quarter, half a year, etc..
• Cash flow statement: a report that shows all cash movements, in and out, over a specific period of time.
• Annual report format : an overview of your company’s financial performance across the year. Annual reports may also include other information such as risk factors, management’s discussion, and so on. 

Types and methods for financial performance analysis

The type of financial statement analysis defines the data to be used. Let’s look at the most common types of analysis to determine the data you need to process.

Horizontal analysis

A horizontal analysis identifies trends and changes in your company’s financial performance over time. It’s also known as a trend analysis and works by comparing financial statements from different periods like year to year or month to month.

You can use horizontal analysis to identify strengths and weaknesses, as well as feasible opportunities and threats.

To perform a horizontal analysis, you need to take a specific item from a financial statement, for example, expenses, and compare it across two or more periods of time. This way you’ll get a year-over-year or quarter-over-quarter analysis of expenses.

Vertical analysis

Vertical analysis is the comparison of financial statements vertically meaning that each line item is represented as a percentage of a base figure within the statement. 

For example, in a vertical analysis of the income statement, each line item would be expressed as a percentage of total revenues. 

The insights derived from such analytics allow you to understand your company’s overall profitability and how it is affected by each revenue item.

Liquidity analysis

A company’s liquidity is its ability to meet its financial obligations. Essentially, it means that a company can pay its bills, including salaries and rent, and doesn’t have to sell any assets for this or incur additional debt.

Liquidity analysis is a key part of financial performance analysis since it gauges a company’s ability to generate cash efficiently. 

The liquidity analysis is typically done by comparing a company’s current assets to liabilities.

Profitability analysis

A profitability analysis answers a simple question – is your business profitable or not. For this, such items as revenue, costs, and profits are analyzed. 

To analyze profitability, you need the following financial metrics: gross profit margin (GPM), net profit margin (NPM), return on investment (ROI), and return on assets (ROA). This information will let you understand which areas of your business generate the most profit and which need improvement.

Variance analysis

Variance analysis is a comparison of actual financial results to the planned ones. It also helps you identify the reasons for the differences between what you expected and the actual outcomes.

For example, if you expected $10,000 in sales for a month and only made $8,000, variance analysis would help you identify the reason for the $2,000 difference. Pricing issues, greater costs, or lower demand could lead to this.

Understanding the reasons for the differences between planned and actual results can help you improve your financial planning and budgeting. This can be adjusting budgets, identifying cost savings opportunities, or investing in areas that are generating higher-than-expected returns.

Financial performance indicators and quantifiable metrics

Here are the metrics most used to analyze a company’s financial performance and how to calculate each.

How to automate your financial reporting for continuous analysis

You can create automatically updated “evergreen” financial reports by automating your data flows. In this way, you will be able to track your metrics in real-time and analyze performance more easily.

Even though automating reporting sounds like a complicated thing, it doesn’t have to be. You can easily do this with user-friendly tools that don’t require any special knowledge to use. For example, we can recommend Coupler.io – it’s a user-friendly, easy-to-use platform that provides businesses with a complete set of tools to help you automate your data flows quickly and efficiently.

Let’s see an example. 

Let’s say you are using  QuickBooks, and the data there constantly changes and updates. You want to transfer it to a spreadsheet, blend it with your data from other sources, and create a report. If you use Coupler.io for automation, it can transfer your data from QuickBooks and other apps to Excel or Google Sheets and then update your financial data in the spreadsheet automatically according to your schedule. As a result, you get an auto-updating report.

Coupler.io allows you to automate data flows from over 75 data sources , including QuickBooks, Xero, ChartMogul, YahooFinance, Excel, and others. Financial analysts commonly connect Stripe to BigQuery to better understand their data.

Or to give you another example, let’s see how you can easily export QuickBooks to Google Sheets . Alternatively, you can use the same flow to export data from QuickBooks to Excel , BigQuery, or Looker Studio.

Creating an automated financial report is very simple:

• Sign-up to Coupler.io and select the apps to connect. In our example, we select QuickBooks as a Source and Google Sheets as a Destination .

• Then you will need to follow the instructions to connect your QuickBooks account and select a data category to extract. We will export Balance Sheet. 

• After this, connect your destination account and select where you want the data to go (eg. if you are automating a data flow to Google Sheets, you’ll select the workbook and sheet).
• Once this is done, you can set up a custom schedule for automatic data refresh.

Run the importer to transfer your Balance Sheet data to Google Sheets. Here’s what the result will look like.

That’s it, now you can add other data on a separate spreadsheet, organize your information into a report, and Coupler.io will refresh it according to your schedule. 

You will now have an auto-updating financial report that is always up-to-date without any manual effort. As you can see, this can be done in a matter of minutes and doesn’t involve any complex steps. Try it out and see for yourself how it would work for the financial reporting tasks in your organization.

Even small steps in automating financial reporting can bring significant results. For example, take a look at this insightful Terminal 1 Case Study . 

Terminal 1, a popular recruitment platform, struggled to blend and process data scattered across several apps. They needed to merge data from two separate QuickBooks accounts, blend it with data from Airtable, and visualize it in one dashboard for live monitoring. Read the full Case Study to learn how they streamlined their dataflows and automated reporting. 

Final words for your company’s financial performance analysis 

From assessing your company’s financial condition to validating your business model or optimizing operating expenses, financial performance analysis is crucial.

In this article, we covered a lot of information, but there is one key thing you can do to stay on top of your numbers and be proactive in managing your business. Financial performance analysis should have data automation at its core. Especially when we are talking about data at scale.

The list of metrics and performance indicators we covered in this article is not exhaustive and when your data comes from multiple sources, updating it manually is only going to lead to inaccurate and unreliable data.

If getting started with your analysis seems overwhelming, the best way forward is to start small, with one type of analysis. Another important thing to keep in mind is that your financial performance analysis should be focused on specific goals you need to achieve. 

We hope this article was helpful to you!

A content manager at Coupler.io whose key responsibility is to ensure that the readers love our content on the blog. With 5 years of experience as a wordsmith in SaaS, I know how to make texts resonate with readers' queries✍🏼

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Financial Ratio Analysis Tutorial With Examples

The Balance Sheet for Financial Ratio Analysis

The income statement for financial ratio analysis, analyzing the liquidity ratios, the current ratio, the quick ratio, analyzing the asset management ratios accounts receivable, receivables turnover, average collection period, inventory, fixed assets, total assets, inventory turnover ratio, fixed asset turnover, total asset turnover, analyzing the debt management ratios, debt-to-asset ratio, times interest earned ratio, fixed charge coverage, analyzing the profitability ratios, net profit margin, return on assets, return on equity, financial ratio analysis of xyz corporation.

While it may be more fun to work on marketing efforts, the financial management of a firm is a crucial aspect of owning a business. Financial ratios help break down complex financial information into key details and relationships. Financial ratio analysis involves studying these ratios to learn about the company's financial health.

Here are a few of the most important financial ratios for business owners to learn, what they tell you about the company's financial statements, and how to use them.

Key Takeaways

• Some of the most important financial ratios for business owners include the current ratio, the inventory turnover ratio, and the debt-to-asset ratio.
• These financial ratios quickly break down the complex information from financial statements .
• Financial ratios are snapshots, so it's important to compare the information to previous periods of data as well as competitors in the industry.

Here is the balance sheet we are going to use for our financial ratio tutorial. You will notice there are two years of data for this company so we can do a time-series (or trend) analysis and see how the firm is doing across time.

Here is the complete income statement for the firm for which we are doing financial ratio analysis. We are doing two years of financial ratio analysis for the firm so we can compare them.

Refer back to the income statement and balance sheet as you work through the tutorial.

The first ratios to use to start getting a financial picture of your firm measure your liquidity, or your ability to convert your current assets to cash quickly. They are two of the 13 ratios. Let's look at the current ratio and the quick (acid-test) ratio .

The current ratio measures how many times you can cover your current liabilities. The quick ratio measures how many times you can cover your current liabilities without selling any inventory and so is a more stringent measure of liquidity.

Remember that we are doing a time series analysis, so we will be calculating the ratios for each year.

Current Ratio : For 2022, take the Total Current Assets and divide them by the Total Current Liabilities. You will have: Current Ratio = 642/543 = 1.18X. This means that the company can pay for its current liabilities 1.18 times over. Practice calculating the current ratio for 2023.

Your answer for 2023 should be 1.31X. A quick analysis of the current ratio will tell you that the company's liquidity has gotten just a little bit better between 2022 and 2023 since it rose from 1.18X to 1.31X.

Quick Ratio : In order to calculate the quick ratio, take the Total Current Ratio for 2022 and subtract out Inventory. Divide the result by Total Current Liabilities. You will have: Quick Ratio = (642-393)/543 = 0.46X. For 2023, the answer is 0.52X.

Like the current ratio, the quick ratio is rising and is a little better in 2023 than in 2022. The firm's liquidity is getting a little better. The problem for this company, however, is that they have to sell inventory to pay their short-term liabilities and that is not a good position for any firm to be in. This is true in both 2022 and 2023.

This firm has two sources of current liabilities: accounts payable and notes payable. They have bills that they owe to their suppliers (accounts payable) plus they apparently have a bank loan or a loan from some alternative source of financing. We don't know how often they have to make a payment on the note.

Asset management ratios are the next group of financial ratios that should be analyzed. They tell the business owner how efficiently they employ their assets to generate sales. Assume all sales are on credit.

• Receivables Turnover = Credit Sales/Accounts Receivable
• Receivables Turnover = 2,311/165 = 14X

A receivables turnover of 14X in 2022 means that all accounts receivable are cleaned up (paid off) 14 times during the 2022 year. For 2023, the receivables turnover is 15.28X. Look at 2022 and 2023 Sales in The Income Statement and Accounts Receivable in The Balance Sheet.

The receivables turnover is rising from 2022 to 2023. We can't tell if this is good or bad. We would really need to know what type of industry this firm is in and get some industry data to compare to.

Customers paying off receivables is, of course, good. But, if the receivables turnover is way above the industry's, then the firm's credit policy may be too restrictive.

The average collection period is also about accounts receivable. It is the number of days, on average, that it takes a firm's customers to pay their credit accounts. Together with receivables turnover, the average collection helps the firm develop its credit and collections policy.

• Average Collection Period = Accounts Receivable/Average Daily Credit Sales
• To arrive at average daily credit sales, take credit sales and divide by 360
• Average Collection Period = $165/2,311/360 = $165/6.42 = 25.7 days
• In 2023, the average collection period is 23.5 days

From 2022 to 2023, the average collection period is dropping. In other words, customers are paying their bills more quickly. Compare that to the receivables turnover ratio. Receivables turnover is rising and the average collection period is falling.

This makes sense because customers are paying their bills faster. The company needs to compare these two ratios to industry averages. In addition, the company should take a look at its credit and collections policies to be sure they are not too restrictive. Take a look at the image above and you can see where the numbers came from on the balance sheets and income statements.

Along with the accounts receivable ratios that we analyzed above, we also have to analyze how efficiently we generate sales with our other assets: inventory, plant and equipment, and our total asset base.

The inventory turnover ratio is one of the most important ratios a business owner can calculate and analyze. If your business sells products as opposed to services, then inventory is an important part of your equation for success.

Inventory Turnover = Sales/Inventory

If your inventory turnover is rising, that means you are selling your products faster. If it is falling, you are in danger of holding obsolete inventory. A business owner has to find the optimal inventory turnover ratio where the ratio is not too high and there are no stockouts or too low where there is obsolete money. Both are costly to the firm.

For this company, their inventory turnover ratio for 2022 is:

Inventory Turnover Ratio = Sales/Inventory = 2,311/393 = 5.9X

This means that this company completely sells and replaces its inventory 5.9 times every year. In 2023, the inventory turnover ratio is 6.8X. The firm's inventory turnover is rising. This is good in that they are selling more products. The business owner should compare the inventory turnover with the inventory turnover ratio of other firms in the same industry.

The fixed asset turnover ratio analyzes how well a business uses its plant and equipment to generate sales. A business firm does not want to have either too little or too much plant and equipment. For this firm for 2022:

Fixed Asset Turnover = Sales/Fixed Assets = 2,311/2,731 = 0.85X

For 2023, the fixed asset turnover is 1.00. The fixed asset turnover ratio is dragging down this company. They are not using their plant and equipment efficiently to generate sales as, in both years, fixed asset turnover is very low.

The total asset turnover ratio sums up all the other asset management ratios. If there are problems with any of the other total assets, it will show up here, in the total asset turnover ratio.

Total Asset Turnover = Sales/Total Asset Turnover = Sales/Total Assets = 2,311/3,373 = 0.69X for 2022. For 2023, the total asset turnover is 0.80. The total asset turnover ratio is somewhat concerning since it was not even 1X for either year.

This means that it was not very efficient. In other words, the total asset base was not very efficient in generating sales for this firm in 2022 or 2023. Why?

It seems that most of the problem lies in the firm's fixed assets. They have too much plant and equipment for their level of sales. They either need to find a way to increase their sales or sell off some of their plant and equipment. The fixed asset turnover ratio is dragging down the total asset turnover ratio and the firm's asset management in general.

There are three debt management ratios that help a business owner evaluate the company in light of its asset base and earning power. Those ratios are the debt-to-asset ratio, the times interest earned ratio , and the fixed charge coverage ratios. Other debt management ratios exist, but these help give business owners the first look at the debt position of the company and the prudence of that debt position.

The first debt ratio that is important for the business owner to understand is the debt-to-asset ratio ; in other words, how much of the total asset base of the firm is financed using debt financing. For example. the debt-to-asset ratio for 2022 is:

Total Liabilities/Total Assets = $1,074/3,373 = 31.8%. This means that 31.8% of the firm's assets are financed with debt. In 2023, the debt ratio is 27.8%. In 2023, the business is using more equity financing than debt financing to operate the company.

We don't know if this is good or bad since we do not know the debt-to-asset ratio for firms in this company's industry. However, we do know that the company has a problem with its fixed asset ratio which may be affecting the debt-to-asset ratio.

The times interest earned ratio tells a company how many times over a firm can pay the interest that it owes. Usually, the more times a firm can pay its interest expense the better. The times interest earned ratio for this firm for 2022 is:

• Times Interest Earned = Earnings Before Interest and Taxes/Interest = 276/141 = 1.96X
• For 2023, the times interest earned ratio is 3.35

The times interest earned ratio is very low in 2022 but better in 2023. This is because the debt-to-asset ratio dropped in 2023.

The fixed charge coverage ratio is very helpful for any company that has any fixed expenses they have to pay. One fixed charge (expense) is interest payments on debt, but that is covered by the times interest earned ratio.

Another fixed charge would be lease payments if the company leases any equipment, a building, land, or anything of that nature. Larger companies have other fixed charges which can be taken into account.

• Fixed charge coverage = Earnings Before Fixed Charges and Taxes/Fixed Charges

In both 2022 and 2023 for the company in our example, its only fixed charge is interest payments. So, the fixed charge coverage ratio and the times interest earned ratio would be exactly the same for each year for each ratio.

The last group of financial ratios that business owners usually tackle are the profitability ratios as they are the summary ratios of the 13 ratio group. They tell the business firm how they are doing on cost control, efficient use of assets, and debt management, which are three crucial areas of the business.

The net profit margin measures how much each dollar of sales contributes to profit and how much is used to pay expenses. For example, if a company has a net profit margin of 5%, this means that 5 cents of every sales dollar it takes in goes to profit and 95 cents goes to expenses. For 2022, here is XYZ, Inc.'s net profit margin:

Net Profit Margin = Net Income/Sales Revenue = 89.1/2,311 = 3.9%

For 2023, the net profit margin is 6.5%, so there was quite an increase in their net profit margin. You can see that their sales took quite a jump but their cost of goods sold rose. It is the best of both worlds when sales rise and costs fall. Bear in mind: The company can still have problems even if this is the case.

The return on assets ratio, also called return on investment , relates to the firm's asset base and what kind of return they are getting on their investment in their assets. Look at the total asset turnover ratio and the return on asset ratio together. If total asset turnover is low, the return on assets is going to be low because the company is not efficiently using its assets.

Another way to look at the return on assets is in the context of the Dupont method of financial analysis. This method of analysis shows you how to look at the return on assets in the context of both the net profit margin and the total asset turnover ratio.

• To calculate the Return on Assets ratio for XYZ, Inc. for 2022, here's the formula:
• Return on Assets = Net Income/Total Assets = 2.6%

For 2023, the ROA is 5.2%. The increased return on assets in 2023 reflects the increased sales and much higher net income for that year.

The return on equity ratio is the one of most interest to the shareholders or investors in the firm. This ratio tells the business owner and the investors how much income per dollar of their investment the business is earning. This ratio can also be analyzed by using the Dupont method of financial ratio analysis. The company's return on equity for 2022 was:

Return on Equity = Net Income/Shareholder's Equity = 3.9%

For 2023, the return on equity was 7.2%. One reason for the increased return on equity was the increase in net income. When analyzing the return on equity ratio, the business owner also has to take into consideration how much of the firm is financed using debt and how much of the firm is financed using equity.

Now we have a summary of all 13 financial ratios for XYZ Corporation. The first thing that jumps out is the low liquidity of the company. We can look at the current and quick ratios for 2022 and 2023 and see that the liquidity is slightly increasing between 2022 and 2023, but it is still very low.

By looking at the quick ratio for both years, we can see that this company has to sell inventory in order to pay off short-term debt. The company does have short-term debt: accounts payable and notes payable, and we don't know when the notes payable will come due.

Let's move on to the asset management ratios. We can see that the firm's credit and collections policies might be a little restrictive by looking at the high receivable turnover and low average collection period. Customers must pay this company rapidly—perhaps too rapidly. There is nothing particularly remarkable about the inventory turnover ratio, but the fixed asset turnover ratio is remarkable.

The fixed asset turnover ratio measures the company's ability to generate sales from its fixed assets or plant and equipment. This ratio is very low for both 2022 and 2023. This means that XYZ has a lot of plant and equipment that is unproductive.

It is not being used efficiently to generate sales for the company. In addition, the company has to service the plant and equipment, pay for breakdowns, and perhaps pay interest on loans to buy it through long-term debt.

It seems that a very low fixed asset turnover ratio might be a major source of problems for XYZ. The company should sell some of this unproductive plant and equipment, keeping only what is absolutely necessary to produce their product.

The low fixed asset turnover ratio is dragging down total asset turnover. If you follow this analysis through, you will see that it is also substantially lowering this firm's return on assets profitability ratio.

With this firm, it is hard to analyze the company's debt management ratios without industry data. We don't know if XYZ is a manufacturing firm or a different type of firm.

As a result, analyzing the debt-to-asset ratio is difficult. What we can see, however, is that the company is financed more with shareholder funds (equity) than it is with debt as the debt-to-asset ratio for both years is under 50% and dropping.

This fact means that the return on equity profitability ratio will be lower than if the firm was financed more with debt than with equity. On the other hand, the risk of bankruptcy will also be lower.

Unfortunately, you can see from the times interest earned ratio that the company does not have enough liquidity to be comfortable servicing its debt. The company's costs are high and liquidity is low. Fortunately, the company's net profit margin is increasing because their sales are increasing.

Hopefully, this is a trend that will continue. Return on Assets is impacted negatively due to the low fixed asset turnover ratio and, to some extent, by the receivables ratios. Return on equity is increasing from 2022 to 2023, which will make investors happy.

As you can see, it is possible to do a cursory financial ratio analysis of a business firm with only 13 financial ratios, even though ratio analysis has inherent limitations.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.2 Operating Efficiency Ratios ." OpenStax.

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 2, 4.

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 3, 6.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.4 Solvency Ratios ." OpenStax.

Nasdaq. " Fixed-Charge Coverage Ratio ."

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 3, 5.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.6 Profitability Ratios and the DuPont Method ." OpenStax.

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What Is Financial Analysis?

• How It Works

Corporate Financial Analysis

Investment financial analysis, types of financial analysis, horizontal vs. vertical analysis, the bottom line.

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Financial Analysis: Definition, Importance, Types, and Examples

Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.

Key Takeaways

• If conducted internally, financial analysis can help fund managers make future business decisions or review historical trends for past successes.
• If conducted externally, financial analysis can help investors choose the best possible investment opportunities.
• Fundamental analysis and technical analysis are the two main types of financial analysis.
• Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security.
• Technical analysis assumes a security's value is already determined by its price, and it focuses instead on trends in value over time.

Investopedia / Nez Riaz

Understanding Financial Analysis

Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment.

This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company's financial statements—the income statement, balance sheet, and cash flow statement. Financial analysis can be conducted in both corporate finance and investment finance settings.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance.

For example, return on assets (ROA) is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis.

There is no single best financial analytic ratio or calculation. Most often, analysts use a combination of data to arrive at their conclusions.

In corporate finance, the analysis is conducted internally by the accounting department and shared with management in order to improve business decision-making. This type of internal analysis may include ratios such as net present value (NPV) and internal rate of return (IRR) to find projects worth executing.

Many companies extend credit to their customers. As a result, the cash receipt from sales may be delayed for a period of time. For companies with large receivable balances, it is useful to track days sales outstanding (DSO), which helps the company identify the length of time it takes to turn a credit sale into cash. The average collection period is an important aspect of a company's overall cash conversion cycle .

A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin, into an estimate of the company's future performance. This type of historical trend analysis is beneficial to identify seasonal trends.

For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas. This allows the business to forecast budgets and make decisions, such as necessary minimum inventory levels, based on past trends.

In investment finance, an analyst external to the company conducts an analysis for investment purposes. Analysts can either conduct a top-down or bottom-up investment approach.

A top-down approach first looks for macroeconomic opportunities, such as high-performing sectors, and then drills down to find the best companies within that sector. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company's fundamentals.

A bottom-up approach, on the other hand, looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis, looking at past performance and expected future performance as investment indicators.

Bottom-up investing forces investors to consider microeconomic factors first and foremost. These factors include a company's overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time.

Financial analysis is only useful as a comparative tool. Calculating a single instance of data is usually worthless; comparing that data against prior periods, other general ledger accounts, or competitor financial information yields useful information.

There are two types of financial analysis as it relates to equity investments: fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value.

Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

Technical Analysis

Technical analysis uses statistical trends gathered from trading activity, such as moving averages (MA).

Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to predict market movements by looking for patterns and trends in stock prices and volumes rather than analyzing a security’s fundamental attributes.

When reviewing a company's financial statements, two common types of financial analysis are horizontal analysis and vertical analysis . Both use the same set of data, though each analytical approach is different.

Horizontal analysis entails selecting several years of comparable financial data. One year is selected as the baseline, often the oldest. Then, each account for each subsequent year is compared to this baseline, creating a percentage that easily identifies which accounts are growing (hopefully revenue) and which accounts are shrinking (hopefully expenses).

Vertical analysis entails choosing a specific line item benchmark, and then seeing how every other component on a financial statement compares to that benchmark.

Most often, net sales are used as the benchmark. A company would then compare the cost of goods sold, gross profit, operating profit, or net income as a percentage of this benchmark. Companies can then track how the percentage changes over time.

Examples of Financial Analysis

In Q1 2024, Amazon.com reported a net income of $10.4 billion. This was a substantial increase from one year ago when the company reported a net income of $3.2 billion in Q1 2023.

Analysts can use the information above to perform corporate financial analysis. For example, consider Amazon's operating profit margins below, which can be calculated by dividing operating income by net sales.

• 2024: $15,307 / $143,313 = 10.7%
• 2023: $4,774 / $127,358 = 3.7%

From Q1 2023 to Q1 2024, the company experienced an increase in operating margin, allowing for financial analysis to reveal that the company earned more operating income for every dollar of sales.

Why Is Financial Analysis Useful?

The financial analysis aims to analyze whether an entity is stable, liquid, solvent, or profitable enough to warrant a monetary investment. It is used to evaluate economic trends, set financial policies, build long-term plans for business activity, and identify projects or companies for investment.

How Is Financial Analysis Done?

Financial analysis can be conducted in both corporate finance and investment finance settings. A financial analyst will thoroughly examine a company's financial statements—the income statement, balance sheet, and cash flow statement.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance. A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin, into an estimate of the company's future performance.

What Techniques Are Used in Conducting Financial Analysis?

Analysts can use vertical analysis to compare each component of a financial statement as a percentage of a baseline (such as each component as a percentage of total sales). Alternatively, analysts can perform horizontal analysis by comparing one baseline year's financial results to other years.

Many financial analysis techniques involve analyzing growth rates including regression analysis, year-over-year growth, top-down analysis, such as market share percentage, or bottom-up analysis, such as revenue driver analysis .

Lastly, financial analysis often entails the use of financial metrics and ratios. These techniques include quotients relating to the liquidity, solvency, profitability, or efficiency (turnover of resources) of a company.

What Is Fundamental Analysis?

Fundamental analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

What Is Technical Analysis?

Technical analysis uses statistical trends gathered from market activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

Financial analysis is a cornerstone of making smarter, more strategic decisions based on the underlying financial data of a company.

Whether corporate, investment, or technical analysis, analysts use data to explore trends, understand growth, seek areas of risk, and support decision-making. Financial analysis may include investigating financial statement changes, calculating financial ratios, or exploring operating variances.

U.S. Securities and Exchange Commission. " Amazon.com Form 10-Q for the Quarter Ended March, 31, 2024 ," Page 4.

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• Certifications

Financial Performance Analysis

Learn financial analysis skills – Performance measurement and evaluation of companies using financial ratios

What I will learn?

• Ratio analysis on financial numbers
• Framework for performance comparison between companies
• Operating health metrics of a company
• Financing health metrics of a company
• Scorecard framework to evaluate the performance of companies

Course Curriculum

Meet your instructor, introduction to the course, what is financial performance analysis, download the excel spreadsheet illustration for this module, illustration for this module, how to measure the performance of companies, what are the key metrics for measuring performance of companies, calculation of operating metrics for company 1, calculation of financing metrics for company 1, calculation of operating and financing metrics for company 2, calculation of operating and financing metrics for company 3 and company 4, calculation of averages for all metrics across companies, visual representation of metrics across companies, ranking of operating metric, ranking of financing metrics, choosing the best company, quick recap: what did we learn, practice assignment #3: difficulty level – easy, solution to practice assignment #3, student feedback.

It was simple, precise and straight to the point. Perfect for beginners and even for professionals. Gives us an insight about the practical aspects of Financial Performance Analysis in the real world!

The course content was exceptionally well-structured, providing a comprehensive overview of financial analysis techniques. It covered various aspects of financial performance assessment, starting with the fundamentals of financial statements and gradually progressing to more advanced topics.

"Advanced Excel Functions" course, and it was an insightful learning experience that delved into the intricacies of Excel's powerful functions. The course content covered a wide range of advanced functions, offering practical insights and applications. The instructors were knowledgeable and provided clear explanations, making complex concepts more accessible.

"Financial Performance Analysis Mastery" course makes my analytical and performing skill as very stronger and also helps a lot in my career.

I am excited the Course Very Interesting!

I am excited to share my enthusiastic review of the "Financial Performance Analysis Mastery" course. This comprehensive course provides an invaluable learning experience for finance professionals, analysts, and individuals seeking to master the art of analyzing a company's financial health and performance. The course content, expert instruction, and practical application make it an essential resource for anyone aiming to make informed financial decisions.

Very different content

Requirements

• None. We will teach everything from scratch.

Material Includes

• 30 day access
• 1.5 hours on-demand video
• Access on mobile
• Certificate of Completion

We have created short courses on specific skills that you will need to master in the business and finance domain. Once you go through the recorded lessons and attend practice sessions online, you will need to finish a short assessment like a quiz and an assignment and send it over. We will review your submission and send you back a score. If you obtain more than 80% result, we will award you a certification for the same.

We have divided the certifications into very specific modules to make it very easy for you to complete any one certification in the least time possible. But really the pace of completing the certification is up to you. As soon as you send us your assignment, we will take 2-3 days to review and send over your result. So whenever you are ready, you should complete the assessment and get certified.

Yes you can, we allow you to make 10 submissions per certification to ensure you have enough opportunities to clear and get certified.

Yes, as long as you have an active membership, you will continue to have access to all resources to the certification.

Yes, each course will have a certification provided on successful completion and taking the assessment successfully at the end of the program

Yes, we will provide a LinkedIn verifiable certificate in different formats that you can add on your social media profile to get access to more opportunities. For example, You can add the certificate under the certification section of LinkedIn where recruiters look at to understand the different skills you possess.

We have a very active LinkedIn presence where we will showcase your certifications on completion. Ideally the more the certifications you complete the better will your chances to be noticed by other members of our LinkedIn community. Our push to your profile will potentially lead to more opportunities coming your way.

Ashish is a Business and Finance Expert with around 10 years of experience in this domain. Previously, he has worked with BlackRock, the world’s largest asset management company, as a Vice President in the Financial Markets Advisory (FMA) team. Prior to that, he worked at McKinsey in the Strategy and Corporate Finance practice. He is also the founder of the website skillfinlearning.com which creates online programs in Business, Finance and Data Analysis topics. At Skillfin Learning, we believe we can change the way we adults learn.

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• Level All Levels
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• Duration 1 hour 10 minutes
• Last Updated September 29, 2023
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