Hi there,I need your help.
please, writing good summary of 2 pages about (Understanding the Basics of Financial Statement Analysis)
use your own wording.
The course is Financial Management
Thank you!
This a subjective question. I have provided a framework for you to structure your thoughts and generate your own answer. My suggestion will be to reflect upon my answer below and prepare your own report.
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Financial reporting is the way companies show their performance to outside world. The objective behind financial statement analysis is to use the company’s financial statements & other relevant information to make economic decisions. Such an analysis is used to evaluate a company’s past performance & current financial position and project company’s ability to earn profits and future cash flows so that economic decisions like whether to invest in the company's securities or whether to extend bank credit to the company can be taken.
Different Financial Statements
are:
1. Statement of Financial Position (Balance
Sheet)
2. Statement of Earnings (Income Statement)
3. Statement of Cash Flows
4. Statement of change in Shareholders’
Equity
Some of the commonly used techniques
of financial statement analysis:
1. Ratio Analysis (most Important)
2. Common Size Analysis
3. Regression Analysis
4. Graphical Analysis
Ratio Analysis
Ratio analysis is used to describe relationships between different variables used in financial statements. It is extensively used to make comparison between different companies and between different time periods. Ratios can aid an analyst in judging a company's financial health, projecting earnings & free cash flow and evaluating activity and efficiency. There are certain limitations of ratios arising due to heterogeneity of a company’s operating activities, inconsistency in the results of ratio analysis, judgment required for interpretation and different accounting methods used by different companies.
There are typical five categories of ratios:
Sl. No. |
Ratio Category |
Indications |
1. |
Liquidity |
Indicator of the ability to pay off liabilities in the short term as they come due. Examples: Current ratio, Quick ratio, Cash ratio. |
2. |
Leverage / Solvency |
Indicator of the firm's cost structure (proportion of fixed vs variable costs) financial leverage and ability to meet its longer-term obligations. Examples: Degree of operating leverage, degree of financial leverage, debt-to-equity, debt-to-capital, debt-to-assets, interest coverage, and fixed charge coverage ratios. |
3. |
Activity / Efficiency |
Indicator of how efficiently a company utilizes its various assets. Examples: inventory turnover, receivable turnover, asset turnover etc. |
4. |
Profitability |
Indicator of how well the company generates operating profits and net profits from its sales. Examples: net, gross, and operating profit margins, pretax margin, return on assets, operating return on assets, return on total capital, return on total equity, and return on common equity. |
5. |
Market / Valuation |
Sales per share, earnings per share, and price to cash flow per share are examples of ratios used in comparing the relative valuation of companies. |
Common size statement analysis
As the name suggests, this analysis first converts the financial statement as a percentage of a selected parameter from the financial statement. The parameter should usually be the most important and largest item on the statement. Useful to make comparison against – Industry average, Competitors/Peers of varying size or Company’s own performance over years.
There are two types of common size statement analysis:
Regression Analysis
Under the regression analysis, relationships are established between the parameters appearing on the financial statements on the basis of regression between sets of historical data. The outcome is a regression equation that helps predict values for a dependent variable based on the values observed for independent variables.
Graphical Analysis
Financials statements are also presented graphically using line graph, stacked graph, bar charts, pie chart, doughnut charts, waterfall diagrams, football field diagram. The pictorial representation helps an analyst draw inferences.
Hi there,I need your help. please, writing good summary of 2 pages about (Understanding the Basics...
Hi there Write a good summarize 1 page about (Understanding the Basics of Financial Statement Analysis) use your own wording. The course is Financial Management Thank you!
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