LAMAR VAN DUSEN

Financial
Analysis
 Financial Analysis

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.
 1. Reviewing the performance of a company

over the past periods

2. Assessing the current position &

operational efficiency
Objectives 3. Predicting growth & profitability

prospects

4. Loan Decision by Financial Institutions

and Banks
 Types of financial analysis
1. Horizontal analysis. This involves the side-by-side comparison of the financial

results of an organization for a number of consecutive reporting periods.

2. Vertical analysis. This is a proportional analysis of the various expenses on the

income statement, measured as a percentage of net sales.

3. Short term analysis. This is a detailed review of working capital, involving the

calculation of turnover rates for accounts receivable, inventory, and accounts

payable.

4. Multi-company comparison. This involves the calculation and comparison of the

key financial ratios of two organizations, usually within the same industry.

5. Industry comparison. This is similar to the multi-company comparison, except that

the comparison is between the results of a specific business and the average results

of an entire industry.
Limitations
1. Dependence on historical costs.
2. Inflationary effects
3. Intangible assets not recorded
4. Based on specific time period
5. Not always comparable across
companies
6. Subject to fraud
7. No discussion of non-financial issues
8. Not verified
9. No predictive value
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