Financial analysis is the process that consists of examining the financial statements and operations of a company, for this, it can be apply different types of financial analysis, which together provide a solid basis for decision making and planning strategic.
He Financial analysis is a key piece for effective business management, as it acts as a compass, guiding companies towards making informed decisions and developing optimal strategies.
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And it is that Financial statements without analysis do not provide valuable information, it is through this analysis that organizations can identify their financial strengths and weaknesses, facilitating adaptation and continuous improvement.
To do this, analysts can apply different types of financial analysis, which together provides a solid foundation to manage the company's resources in a more efficient way, ensuring liquidity and solvency to keep the business going.
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In this article you will find:
What is financial analysis?
He financial analysis is he process of examining the financial statements and operations of a company in order to understand its financial health and facilitate making informed decisions.
Ortiz, Soto (2017), describes that, “Financial analysis is the study made of the company's accounting information, expressed through the results of the financial statements, this information is of little importance. useful if it is not interpreted, so that with the conclusions decisions can be made from it, in order to obtain better performance in organizations over time." (P. 101)
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Therefore, financial analysis is a methodical process that allows us to examine and interpret the financial health of the company. for decision-making and facilitating short- and long-term strategic planning.
Although There are different types of financial analysis, each of them must comply with the following steps:
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- Recompile financial information.
- Determine the analysis method.
- Analyze financial information.
- Evaluate the results.
- Make decisions and carry out strategic plans.
3 Types of financial analysis
There are different types of financial analysis that can be applied to financial statements, although in general, there are three types, the vertical and horizontal financial analysis, and the ratios or financial reasons.
Vertical financial analysis
Vertical financial analysis is a method used to evaluate the structure of statements financial statements of a company, specifically the balance sheet and income statement, this type of analysis seeks to determine the percentage relationship that each account or item has with respect to a total figure or reference account.
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Vertical financial analysis is useful to determine the composition and proportion of different accounts, as well as to identify trends in the company's financial structure.
On the balance sheet, vertical financial analysis evaluates the proportion of asset and liability accounts in relation to equity. net of the company, while, in the income statement, this analysis shows the percentage relevance of the income accounts and bills.
Horizontal financial analysis
Horizontal analysis is a method of financial analysis that is focuses on the evolution of a company's financial figures over time, comparing figures from different periods to identify increases, decreases, and trends in financial statement accounts.
This analysis is very useful to understand how a company has progressed over time, being very useful to assess the company's capacity. company in the management of its resources, to verify if the objectives have been achieved in financial terms, and to establish future estimates.
Analysis of financial ratios
Financial ratio analysis, also known as financial ratio analysis, is a tool that allows you to evaluate and compare the health and financial performance of a company.
This analysis consists of establishing relationships between different accounts or figures in the financial statements (such as the balance sheet and income statement) to obtain meaningful information about certain financial aspects of the company.
These financial ratios have different categories or groups of ratios that allow analyzing different key areas, the most used categories are:
- Liquidity ratios.
- Debt reasons.
- Reasons for activity or management.
- Profitability ratios.
Liquidity ratios:They evaluate the company's ability to meet its short-term obligations, taking into account that liquidity is the immediate money capacity that the company has to meet its obligations.
Among the liquidity ratios are:
- Current reason: Current assets/Current liabilities.
- Quick reason: Current assets- Inventory/ Current liabilities.
- Net working capital: Current assets-Current liabilities.
Debt reasons: Also called leverage ratios, these ratios show the proportion of debt that the company maintains with external entities compared to its equity; In other words, they indicate how committed the company's assets are to meeting existing debts with creditors and suppliers.
Among the debt ratios are:
- Debt Level: Liabilities / Total assets x 100.
- Debt/equity level: Liabilities / Total Equity x 100.
Reasons for activity or management:These analyze how the company uses its assets to generate income and carry out its operations.
Among these indicators are:
- Inventory Rotation: Cost of Sales/Average Inventory.
- Average Inventory Age: 365 days/ Inventory rotation.
- Accounts Receivable Turnover: Credit sales/Average accounts receivable.
- Average collection period: 365 days/ Turnover of accounts receivable.
- Average Operational Cycle: Average period payment + avg. age Inventory/ 2.
- Total Asset Turnover: Sales income/Total assets x 100.
Profitability ratios: They are used to evaluate how efficiently the company produces profits in relation to sales for a given period. The higher the value of this ratio, the more significant the benefits obtained will be.
Among this category, you can find:
- Gross margin: Gross profit on sales/Income (sales) x 100.
- Net profit margin ratio: Profit for the year/Income (sales) x 100.
Bibliographic references
Fajardo Mercedes, Soto Carlos (REDES Collection 2017). Business Financial Management. UTMACH Editions. Machala – Ecuador. 183 page 22X19cm ISBN: 978-9942-24-110-8.
