Financial Analysis - Assignment Example

Financial Analysis affiliation Financial Analysis Ratio Analysis The ratio analysis has become the primary technique thatis used by companies to analyze financial statements. It involves comparisons with past performance, with other companies in the same industry, and with average industrial figures. Ratio analysis assumes that one single figure cannot be able to provide useful information, but when compared with another figure, it can be able to provide useful information. Ratios are expressed in form of a percentage or pure ratio.

Ratios are useful because they are used in decision making. One group that uses financial ratio are the management team in evaluating the performance of the company in terms of profitability, operational efficiency, and financial health over a period of time by comparing past and present ratios, and also comparing this with the industrial average (Brigham, 2012). Shareholders are other groups that use information from ration analysis. Information in the financial statement is usually difficult for outsiders to understand.

The ratio analysis helps in analyzing and interpreting information from the financial statements in a simplified manner, and in a manner that can be understood by those who do not know the accounting language. This information helps them know the position of their investment and expected returns from their investment. The ratio analysis is useful in analyzing the liquidity of the company. This information is useful to the third group that uses the ratio analysis are the creditors. They are able to know the company’s capacity to meet their long term liabilities which determines the credit terms.

Qualitative Factors Financial analysis usually tries to determine the qualitative factors when evaluating the future financial performance. One qualitative factor is the competitive advantage which determines the company’s ability to survive in the market. This also determines the company’s ability to keep competitors at bay, enjoy profits, and growth. Corporate governance has become a crucial issue today which determines the relationship between directors, management, and other stakeholders.

One aspect of corporate governance is financial transparency. This implies that the financial information is being released in a manner that stakeholders are able to follow what the management if doing, thus have a clear understanding on the financial situation. This also increases the trust that stakeholders have in the company, ensuring a long term relationship. Finally, the structure of the board of directors under corporate governance determines the future performance of a company. A combination of inside and outside representatives at the board makes sure that there is independence in the assessment of the performance of managers, making sure that shareholders’ interests are represented.

Steps in Financial Analysis There are six crucial steps in the financial analysis framework including acquiring the company’s financial statement for several years. These statements are the balance sheets, the income statements, the shareholders equity statements, and the cash flow statements. The next step is looking for large movement in the amounts of specific items from one year to the next (Brigham, 2013). It is crucial to find information explaining variances in the amounts per item. The next step is looking at the notes accompanying the financial statements for any information that can be useful in the analysis.

The next step is examining the balance sheet in order to locate changes in the components of the company’s assets and liabilities. Any changes needs to be researched to find information that will explain this. The next step is to calculate the financial ratio of each year and comparing the information with past ratios, competitors ratio, and the industrial ratio. Finally, all of the data collected, both positive and negative needs to be interpreted. This helps in determining the performance of the company over the years and as compared to its competitors and the industrial average.

ReferencingBrigham, E. F., & Daves, P. R. (2013). Intermediate financial management. Mason, Ohio: South-Western.Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Mason, Ohio: South-Western Cengage Learning.