TECHNIQUES IN FINANCIAL ANALYSIS

INTRODUCTION
Financial statement analysis or financial analysis is the process of
reviewing and analyzing a company's financial statements to make better
economic decisions. These statements include income statement, balance
sheet, cash flow statement, statement of changes in equity. Financial
Statement asses the financial health & performance of the company. It consist
of comparisons for the company over the period of time and comparisons of
different companies either in the same industry or in different industries. It is
also the important record of company or the financial data on every aspect of a
business activity.
In general, financial statements are centered around generally accepted
accounting principles. These principles require a company to create and
maintain three main financial statements: balance sheet, income statement,
and cash flow statement. Companies used these financial statements to
manage the operations of their business and also provide reporting
transparency to their stakeholders. All these are interconnected and create
different views of a company’s activities and performance.

BODY
There are tools for Financial Analysis: Comparative Statement, common-
size Statement, Trend Analysis, Ratio Analysis, Fund Flow Statement and Cash
Flow Statement.
1. Comparative Statement is also called as Horizontal Analysis.
It shows the financial position of a company at different period of time.
It is useful in analyzing the changes over time. They carry data relating to
two or more years and facilitate the comparison of an item with the
previous years and even the future figures may be projected using time
series.
There are two comparative Statement: Balance Sheet and Income
Statement.
 a. Balance Statement – it is the financial statement of the company
which includes assets, liabilities, equity capital, total debt, at a point
of time. It is more like snapshot of financial position of a company at
a specified time, usually calculated after every quarter- six months or
one year.
Balance sheets has two main heads- assets and liabilities.
Assets are those resources or things which the company owns. They
can be divided into current as well as non- current assets or long-
term assets.
Liabilities are debts or obligations of a company. It is the amount tat
the company owes to its creditors. It can be divided into current
liabilities and long-term liabilities. Another important head in the
balance sheet is shareholder or owner’s equity. Assets are equal to
total liabilities and owner’s equity. Owner’s equity is used when the
company is a sole proprietorship and shareholder’s equity is used
when the company is a corporation. It is also known as book value of
the company.
b. Income Statement – is one of the important financial statements
used for reporting a company’s financial performance over a specific
accounting period. It is also the profit and loss statement or
statement of revenue and expense, the income statement primarily
focuses on the company’s revenues and expenses during a particular
period of time. An income statement provides valuable insights into
a company’s operations, efficiency of its management, under-
performing sectors and its performance relative to industry peers.
2. Common Size Statement – is an income statement in which each item is
expressed as a percentage of the value of revenue or sales. It is used for
vertical analysis, in which each line item in a financial statement is
represented as a percentage of a base figure within the statement. It
helps to analyze and compare a company’s performance over several
period of time with varying sales figures. The common size percentages
can be compared to those of competitors to determine how the
company is performing relative to the industry.
3. Trend analysis - It determines the direction upwards or downwards.
Under this analysis the values of an item in different year is expressed in
 relation to the value in one year called the base year. It is also a
technique used in technical analysis that attempts to predict the future
stock price movements based on recently observed trend data. It tries to
predict such as bulk market run, and ride that trend until data suggest a
trend reversal.
4. Ratio Analysis – The most popular way to analyze the financial statement
is computing ratios. It is an important and widely used tool of analysis of
financial statements. It is study of ratios with various items or groups in
Financial statement. To calculate the ratio, Current ratio is equal to
Current Assets divided by Current liabilities.

For example:

2010 2011
Current assets 38.29 38.36
Current liabilities 30.34 27.95
Current Ratio 1.3:1 1.4:1

This means that this ratio indicates the company has more current
assets than current liabilities.

 Liquidity Ratios – are an important class of financial metrics used

to determine a debtor’s ability to pay off current debt obligations
without raising external capital. It measures the company’s ability
 to pay debt obligations and its margin of safety through the
calculation of metrics including the current ratio, quick ratio, and
operating cash flow ratio.
 Leverage Ratio – is the proportion of debts that a bank has
compared to its equity or capital.

For example:
Debt to equity ratio = 200/ 800 = 0.25
Debt to capital = 200/1000 = 0.20
Debt to assets = 200/ 500 = 0.40

Capital = Debt + equity

200 + 800 = 1,000

 Activity Ratio – is a type of financial ratios which are used by the

company in order to determine the efficiency with which the
company is able to use its different operating assets that are
present in its balance sheet and convert the same into the sales or
in the cash.
It is helpful in evaluating a business operating efficiency by
analyzing fixed assets, inventories, accounts and receivables. It is
not just expressing a business financial health but also indicates
the utilization of the balance sheet components.

 Profitability Ratios – it measures the company’s performance. It is

simply the capacity to make a profit, and a profit is what is left
over from income earned after you have deducted all cost and
expenses related to earning the income.
5. Cash Flow Statement – It is the financial statement that summarizes the
amount of cash and cash equivalents entering and leaving the company.
It measures how well the company manages its cash to pay its debts
obligation and fund its operating expenses.
6. Fund Flow Statement – the flow of funds throughout a business or
company. It is not of all cash in and out of all various financial assets. It is
usually measured on a monthly or quarterly basis. It is the movement of
 cash only. These includes payments to investors or payments made to
the company in exchange for goods and services.

CONCLUSION
Therefore; Financial statement analysis is used by internal and external
stakeholders to evaluate business or company’s performance and value. If
conducted internally, financial analysis can help managers make future
business decisions or review historical trends or past success. If conducted
externally, financial statement can help investors choose the best possible
investment opportunities.
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 value over
time.
Analyzing financial statement is important part of decision making
because finances and the valuation of profits and looses are the most
important drivers in business.
We have learned some knowledge from the subject or topic about
Financial analysis. This is our first time we had chance to learn this subject,
before we just heard some information on newspaper, and watching the news.
When we start learning this subject gives us the impression that it is difficult to
understand. We can say we already learned some skills. This method or skills
would not only be helpful for your learning in the future but also would bring a
surprise and achievability to you. Another point is the awareness of
cooperation.
We conclude that the most important things you must master is you
should try to distinguish the meaning of the capital, assets and liability, and
also how to prioritize the wants and needs.