Financial Analysis

Assignment No: 1
Submitted To:
Sr. Abid Noor
Submitted By:

Shaista Bano

l1f17bsaf0112

Section: B

Types of Financial Analysis

Financial Analysis
“Financial analysis is the process involves using financial data to access a
company’s performance and make recommendation about how it can improve
going forward.” Financial analysis means the analysis of the financial statement to
reach up to the productive conclusion, which will help the investors and other
stakeholders to maintain their relationship with the company and there are various
types that experts and analysts use to do a post-mortem of financial statements.
Financial Analysts
Financial analysts primarily carrying out their work in excel to analyze historical
data and make projections for future performances.
Types of financial analysis
Analyzing and interpreting data by various types according to their suitability. The
most common types of financial analysis are:
 Vertical analysis
 Horizontal analysis
 Leverage ratio analysis
 Profitability analysis
 Liquidity analysis
 Efficiency analysis
 Cash flows analysis
 Rates of returns analysis
 Valuation analysis
 Variance analysis

1. Vertical analysis:
Vertical analysis is the proportional analysis of a financial statement, where each
line item on a financial statement is listed as a percentage of another item. This
means that every line item on an income statement is stated as a percentage of
gross sales, while every line item on a balance sheet is stated as a percentage of
total assets.
Vertical Analysis of the balance sheet:
In vertical analysis of balance sheet on the asset side, to disclose all the line items
in the percentage form of total assets. We can understand and compare all items of
balance sheet in percentage.
Formula:
Vertical Analysis Formula (Balance Sheet) = Balance Sheet Item / Total Assets
(Liabilities) * 100

Vertical Analysis of the Income Statement:

The most common use of vertical analysis in an income statement is to show the
various expense line items as a percentage of sales, though it can also be used to
show the percentage of different revenue line items that make up total sales.
Formula:
Vertical Analysis Formula (Income Statement) = Income Statement Item / Total

Sales * 100

The information provided by this income statement format is useful not only for
spotting spikes in expenses, but also for determining which expenses are so small
that they may not be worthy of much management attention.
2. Horizontal Analysis:
The horizontal analysis measures the financial statements line of items with the
base year. That means, it compares the figures for a given period with the other
period. It is a useful to evaluate the trend situations. The statements for two or
more periods are used in horizontal analysis.

Horizontal Analysis of the Income Statement

Horizontal analysis of the income statement is usually in a two-year format, such
as the one shown below, with a variance also shown that states the difference
between the two years for each line item. After taking difference, divide the
variance to base year and get percentage of that amount.
Formula:
Horizontal Analysis Formula (Income Statement) = current year – base year / [base
year] * 100

Horizontal Analysis of the Balance Sheet

Horizontal analysis of the balance sheet is also usually in a two-year format, such
as the one shown below, with a variance showing the difference between the two
years for each line item.
Formula:
Horizontal Analysis Formula (Balance Sheet) = current year – base year / [base
year] * 100
3. Leverage ratio analysis
A leverage ratio is any kind of financial
ratio that indicates the level of debt
incurred by a business entity against
several other accounts in its balance
sheet, income statement, or cash flow
statement. These ratios provide an
indication of how the company’s assets and
business operations are financed (using
debt or equity). 
List of common leverage ratios
There are several different leverage ratios that may be considered by market
analysts, investors, or lenders.
o Debt-to-Assets Ratio = Total Debt / Total Assets
o Debt-to-Equity Ratio = Total Debt / Total Equity
o Debt-to-Capital Ratio = Today Debt / (Total Debt + Total Equity)
o Asset-to-Equity Ratio = Total Assets / Total Equity

4. Profitability analysis:
Profitability ratios are financial metrics used by analysts and investors to measure
and evaluate the ability of a company to generate income (profit) relative to
revenue, balance sheet assets, operating costs, and shareholders’ equity during a
specific period of time. They show how well a company utilizes its assets to
produce profit and value to shareholders.
Common examples:
o Gross profit margin
o EBIT margin and
o Net profit margins

5. Liquidity analysis:
Liquidity ratio analysis refers to the use of several ratios to determine the ability of
an organization to pay its bills in a timely manner. This analysis is especially
important for lenders and creditors, who want to gain some idea of the financial
situation of a borrower or customer before granting them credit. There are several
ratios available for this analysis.
Some examples:
o Cash ratio
o Quick ratio.
o Current ratio
6. Efficiency analysis:
Efficiency ratios measure a company's ability to use its assets and manage its
liabilities effectively in the current period or in the short-term. Although there are
several efficiency ratios, they are similar in that they measure the time it takes to
generate cash or income from a client or by liquidating inventory.
Common efficiency ratios:
Efficiency ratios include the inventory turnover ratio,
asset turnover ratio, and receivables turnover ratio.
These ratios measure how efficiently a company uses its
assets to generate revenues and its ability to manage
those assets.

7. Cash Flow Analysis:

Cash flow analysis is the evaluation of a company’s cash inflows and outflows
from operations, financing activities, and investing activities. In other words, this is
an examination of how the company is generating its money, where it is coming
from, and what it means about the value of the overall company.

8. Rates of returns analysis:

A rate of return (RoR) is the net gain or loss on an investment over a specified time
period, expressed as a percentage of the investment’s initial cost. Gains on
investments are defined as income received plus any capital gains realized on the
sale of the investment.
Formula for RoR
Rate of return= [(Current value−Initial value)/ Initial value] ×100

9. Valuation analysis:
Valuation analysis is a process to estimate the approximate value or worth of an
asset, whether a business, equity or fixed income security, commodity, real estate,
or other asset. The analyst may use different approaches to valuation analysis for
different types of assets
When valuing a company as a going concern, there are three main valuation
methods used by industry practitioners.

10. Variance analysis:

Variance analysis is the quantitative investigation of the difference between actual
and planned behavior. This analysis is used to maintain control over a business.
For example,
If you budget for sales to be $10,000 and actual sales are $8,000, variance analysis
yields a difference of $2,000. Variance analysis is especially effective when you
review the amount of a variance on a trend line.