Financial Analysis
Financial analysis refers to the evaluation of a business's financial health and performance to support planning, budgeting, monitoring, forecasting, and continuous improvement. It helps determine whether an entity is stable, solvent, liquid, and profitable enough to justify investment or further strategic involvement.
When analyzing a company, financial analysts typically focus on three core financial statements: the income statement, balance sheet, and cash flow statement. A critical component of financial analysis involves projecting future performance based on historical data.
 |
| Master Financial Analysis Goals with Wahid Theory: A Comprehensive Guide |
Applications built on the MicroStrategy platform enhance the efficiency and effectiveness of financial analysis processes. These tools support professionals in evaluating the viability, stability, and profitability of a business, business unit, or project.
Financial analysts often prepare detailed reports using financial ratios derived from financial statements and other relevant data. These reports serve as key resources for top management when making strategic business decisions.
- Continue or discontinue its main operation or part of its business;
- Make or purchase certain materials in the manufacture of its product;
- Acquire or rent/lease certain machineries and equipment in the production of its goods;
- Issue stocks or negotiate for a bank loan to increase its working capital;
- Make decisions regarding investing or lending capital;
- Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.
Goals or Objective of Financial Analysis
Financial analysts often assess the following elements of a firm:
- Profitability - Its ability to earn income and sustain growth in both the short- and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;
- Solvency - Its ability to pay its obligation to creditors and other third parties in the long-term;
- Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; Both solvency and liquidity are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.
- Stability - the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of the income statement and the balance sheet, as well as other financial and non-financial indicators. etc.
Method of Financial Analysis
Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):
- Past Performance - Across historical time periods for the same firm (the last 5 years for example),
- Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values, this extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.
- Comparative Performance - Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example:
- Net income / equity = return on equity (ROE)
- Net income / total assets = return on assets (ROA)
- Stock price / earnings per share = P/E ratio
Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:
- They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.
- One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance.
- Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.
- Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.
- Fundamental analysis.
Financial Analysis Techniques
Financial Analysis Techniques is embattled toward external reporting and analysis, following generally accepted accounting principles (GAAP) as the foundation for the data used, this is a proper guideline which will be helpful for discover how to financial analysis used techniques & tools in an organization’s operations,
- Accept the information, models & studies used to effectively communicate the financial side of your business to your non-financial generation
- Assessment, restore and keep informed for your analytical skills to gain better insight into an organization’s operations
- Affective assessment drivers to recover the value of your business
- Employ sustainable development techniques to assess your increase theory
- Exemplify and correspondence the impact of operations on cash flow to your operational invention
Wahid Theory: A Guide to Financial Valuation and Analysis
Financial analysis techniques & tool can be used for Wahid theory. The expression or Wahid stands for:
- W - Wakefulness
- A – Accountable
- H – Heed
- I – Intelligence
- D - Determination
Overview
The Wahid Theory serves as a practical framework for financial consultants, planners, advisers, business owners, and readers involved in financial valuation. It provides a structured, end-to-end approach to understanding and applying valuation tools within an organization. While not a formal valuation standard, the Wahid Theory acts as a guiding reference for professionals preparing business valuations, especially in contexts such as business planning, investment analysis, and loan applications.
Application in Business Planning
If you're developing a business plan for a bank loan, your financial projections will be one of the most critical components. Bank managers want to see that your financial assumptions are realistic and that your projected cash flow will be sufficient to cover loan repayments. For instance, if your business is projected to earn $1,000 per month but your loan payment is $1,200, your plan is likely to be rejected. The Wahid Theory helps structure these financial assessments clearly and logically, making them easier to understand and more credible to stakeholders.
Key Considerations in Valuation
Business valuations under the Wahid Theory emphasize that financial outcomes are heavily influenced by the specific facts and circumstances of each case. Since no two situations are exactly alike, methodologies may vary depending on the nature of the business, its industry, and its operational context.
It's important to note that the Wahid Theory does not represent official valuation advice, a formal valuation opinion, or a substitute for professional services. Instead, it provides exposure to the key elements and considerations that arise during the financial consulting process.
Core Financial Analysis Techniques
Financial analysts can enhance their understanding of a business’s performance using the following methods:
- Percentage Analysis - This method expresses financial data as a percentage of a base figure. For example, expenses may be shown as a percentage of net income, enabling easier comparison across time periods or with other businesses.
- Horizontal Analysis - This involves tracking changes in financial figures over time. By expressing each year's figure as a percentage change from the previous year, analysts can identify trends and growth patterns.
- Vertical (Common-Size) Analysis - Vertical analysis converts all figures on financial statements into a percentage of a base value. On the income statement, each item is typically shown as a percentage of sales; on the balance sheet, items are shown as a percentage of total assets. This allows for easier comparison between companies of different sizes.
- Comparative Analysis - Comparative analysis displays financial results from multiple time periods side-by-side. This format simplifies the detection of changes, trends, or anomalies and supports more informed decision-making.
FAQ’s
What is Financial Analysis?
Financial analysis is the process of evaluating financial data—such as financial statements—to understand a company’s performance, stability, and profitability. It helps in decision-making for investors, management, and creditors.
Why is Financial Analysis important?
It provides insights into a firm’s financial health, helps in forecasting future performance, supports investment and credit decisions, and guides management in planning and control.
Who uses Financial Analysis?
- Management: for internal control and planning.
- Investors: for investment decisions.
- Creditors: for evaluating creditworthiness.
- Government & Regulators: for compliance and policy-making.
0 Comments