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Analysis

Analysis

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Published by Rajeshkumar Venky

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Published by: Rajeshkumar Venky on May 17, 2012
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They study based on the three basic financial statements:
Balance sheet
Income statement
Cash Flow statement
THE BALANCE SHEET
The balance sheet is a summary of the assets, liabilities, and equity of a business ata particular point in time—usually the end of the firm‘s fiscal year.
Assets
are the resources of the business enterprise, such as plant and equipment that areused to generate future benefits. If a company owns plant and equipment that will be usedto produce goods for sale in the future, the company can expect these assets (the plant andequipment) to generate cash inflows in the future.
Liabilities
are obligations of the business. They represent commitments to creditors in theform of future cash outflows. When a firm borrows, say, by issuing a long-term bond, it becomes obligated to pay interest and principal on this bond as promised. Equity, alsocalled shareholders‘ equity or stockholders‘ equity, reflects ownership. The equity of a firmrepresents the part of its value that is not owed to creditors and therefore is left over for theowners. In the most basic accounting terms, equity is the difference between what the firmowns—its assets—and what it owes its creditors—its liabilities.
THE INCOME STATEMENT
An
income statement
is a summary of the revenues and expenses of a businessover a period of time, usually one month, three months, or one year. This statement is alsoreferred to as the
profit and loss statement
. It shows the results of the firm‘s operating andfinancing decisions during that time.The operating decisions of the company—those that apply to production and marketing— generate
sales
or 
revenues
and incur the
cost of goods sold
(also referred to as the
cost of sales
or the
cost of products sold
). The difference between sales and cost of goods sold is
gross profit
. Operating decisions also result in administrative and general expenses, suchas advertising fees and office salaries. Deducting these expenses from gross profit leaves
operating profit
, which is also referred to as
earnings before interest and taxes
(EBIT),
 
operating income
, or 
operating earnings
. Operating decisions take the firm from sales toEBIT on the income statement.The results of financing decisions are reflected in the remainder of the income statement.When interest expenses and taxes, which are both influenced by financing decisions, aresubtracted from EBIT, the result is net income. Net income is, in a sense, the amountavailable to owners of the firm. If the firm has preferred stock, the preferred stock dividends are deducted from net income to arrive at
earnings available to commonshareholders
. If the firm does not have preferred stock (as is the case with Fictitious andmost nonfictitious corporations), net income is equivalent to earnings available for common shareholders. The board of directors may then distribute all or part of this ascommon stock dividends, retaining the remainder to help finance the firm.
CASH FLOW STATEMENT:
It is a statement, which measures inflows and outflows of cash on account of anytype of business activity. The cash flow statement also explains reasons for such inflowsand outflows of cash so it is a report on a company's cash flow activities, particularly itsoperating, investing and financing activities.
FINANCIAL ANALYSIS
Financial analysis is a tool of financial management. It consists of the evaluation of the financial condition and operating performance of a business firm, an industry, or eventhe economy, and the forecasting of its future condition and performance. It is, in other words, a means for examining risk and expected return. Data for financial analysis maycome from other areas within the firm, such as marketing and production departments,from the firm‘s own accounting data, or from financial information vendors such asBloomberg Financial Markets, Moody‘s Investors Service, Standard & Poor‘s Corporation,Fitch Ratings, and Value Line, as well as from government publications, such as theFederal Reserve Bulletin. Financial publications such as Business Week, Forbes, Fortune,and the Wall Street Journal also publish financial data (concerning individual firms) andeconomic data (concerning industries, markets, and economies), much of which is now alsoavailable on the Internet.Within the firm, financial analysis may be used not only to evaluate the performance of thefirm, but also its divisions or departments and its product lines. Analyses may be performed
 
 both periodically and as needed, not only to ensure informed investing and financingdecisions, but also as an aid in implementing personnel policies and rewards systems.Outside the firm, financial analysis may be used to determine the creditworthiness of a newcustomer, to evaluate the ability of a supplier to hold to the conditions of a long-termcontract, and to evaluate the market performance of competitors.Firms and investors that do not have the expertise, the time, or the resources to performfinancial analysis on their own may purchase analyses from companies that specialize in providing this service. Such companies can provide reports ranging from detailed writtenanalyses to simple creditworthiness ratings for businesses. As an example, Dun &Bradstreet, a financial services firm, evaluates the creditworthiness of many firms, fromsmall local businesses to major corporations. As another example, three companies— Moody‘s Investors Service, Standard & Poor‘s, and Fitch—evaluate the credit quality of debt obligations issued by corporations and express these views in the form of a rating thatis published in the reports available from these three organizations.
FINANCIAL RATIO ANALYSIS
Ratio analysis is such a significant technique for financial analysis. It indicatesrelation of two mathematical expressions and the relationship between two or more things.
Financial ratio
is a ratio of selected values on an enterprise's financial statement.There are many standard ratios used to evaluate the overall financial condition of acorporation or other organization. Financial ratios are used by managers within a firm, bycurrent and potential stockholders of a firm, and by a firm‘s creditor. Financial analysts usefinancial ratios to compare the strengths and weaknesses in various companies.Values used in calculating financial ratios are taken from balance sheet, income statementand the cash flow of company, besides Ratios are always expressed as a decimal values,such as 0.10, or the equivalent percent value, such as 10%.
Essence of ratio analysis:

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