The financial analysis - analytical study of the company's ability to finance its activities.
Financial analysis subject - business processes and financial results of the organization, which are formed under the influence of various external and internal factors and form a system of analytical, financial, economic and other information.
goalanalysis is to establish and assess the financial condition of the enterprise and constantly carry out work aimed at improving it.
FA tasks:
Assessment of the composition and structure of financial resources;
Determination of factors and causes of the achieved state;
Identification of reserves for improving the financial condition of the enterprise and increasing the efficiency of activities.
Objectsfinancial analysis are: industrial enterprises, joint stock companies, trade organizations, credit institutions and other economic entities, as well as specific financial and economic indicators (liquidity, profitability, financial stability).
Subjects financial analysis are leaders, managers of different levels, authorized to make and implement management decisions.
Financial analysis is necessary to identify and eliminate shortcomings in the financial activities of the enterprise and to find reserves for improving the FSP. With the help of the analysis, it is possible to develop the most reliable assumptions and forecasts of the future financial conditions of the enterprise.
Types of financial analysis.
The classification of types of financial analysis is based on the following signs:
Time - prospective (predictive) analysis, operational analysis, current (retrospective) analysis based on the results of activities for a particular period. To solve possible problems in a specific situation in the future, a situational (momentary, one-time) analysis is used;
The current one gives the characteristics of the already carried out economic activity.
Perspective analysis is the analysis of the results of the activity of an economic entity in the future. Prospective analysis builds on the results of the current analysis and can be seen as an extension of it. Prospective analysis is very close in essence and methods to planning and forecasting.
Operational analysis, like the current one, is based on already accomplished facts. It differs from the 1st in that it uses more operational data of primary accounting, personal observation. Natural indicators are more often analyzed. Its main task is to quickly identify changes in production and reserves for improving the current state.
Use of information- internal management and external analysis. External analysis is carried out on the basis of public financial and statistical reporting by creditors, investors and other entities.
For internal financial analysis, the subject is the management of the enterprise itself, and the information used is obtained both by summarizing primary accounting data and data obtained in the course of special studies. Such information is most often a trade secret.
General characteristics of financial analysis
Analysts work in a number of functional areas. As a rule, analysts evaluate investments in some type of security that has characteristics equity (representing a share of ownership) or debt (representing a lending position). When making investment decisions or justification of recommendations, analysts must evaluate the performance, financial position and value of the issuing company.
Company financial data, which includes financial statements and other data, provide the information necessary to evaluate a company and its securities. Therefore, the analyst must have a solid understanding of the information presented in each company's financial statements, including financial explanations and other forms of supplementary information.
The essence of enterprise financial analysis
Role financial reporting of companies consists in providing information on their activities, financial position and changes in financial position, which will be useful to a wide range of users in making economic decisions. Role Analysis of financial statements consists in the use of financial statements prepared by companies in combination with other information to assess the past, current, and prospective performance and financial position of a company in order to justify investment, credit, and other economic decisions.
When evaluating financial statements, analysts typically justify an economic decision. Examples of such solutions include the following:
- Assessment investment efficiency into equity to be included in an investment portfolio.
- Assessment mergers or acquisitions the candidate enterprise.
- Assessment subsidiary or the operating unit of the parent company.
- Deciding whether to undertake a venture capital investment or other type of private equity investment.
- Definition creditworthiness the company that made the loan request.
- Expansion of the loan to the client.
- Expertise compliance with loan agreements or other contractual agreements.
- Assignment rating company debt or bond issue.
- Valuation of a security for acceptance investment advice other market participants.
- Forecasting future net income and cash flows.
In general, analysts seek to study the performance and financial position of the company, as well as predict future results and financial strength. They are also interested in factors that affect the future activities of the company.
Company performance research may include an assessment profitability companies (the opportunity to profit from the sale of goods and services) and assessment ability of her cash flow generate profits (the ability to generate cash receipts above cash payments). Profit and cash flow are not equivalent. Profit is the excess of prices for certain goods or services over the cost of providing those goods and services (regardless of when the money is received or paid).
While profitability is important, the ability to generate positive cash flow... Cash flow is important because, ultimately, cash is needed to pay employees, suppliers, and other participants to continue operating for the foreseeable future.
A company that generates positive cash flow from operating activities, has great flexibility in financing the required investments and can take advantage of attractive business opportunities compared to a comparable company without positive cash flow. In addition, cash flow is a source return capital of suppliers.
Thus, the expected amount of future cash flows is important in evaluating corporate securities and in determining the company's ability to meet its obligations. The ability to meet short-term obligations is generally referred to as liquidity and the ability to meet long-term obligations are usually called solvency or financial stability.
As noted earlier, profit reflects a company's ability to provide goods and services at prices higher than the cost of providing goods and services. Earnings also provide useful information about future (and past) cash flows. Many analysts not only estimate past profitability, but also forecast future profitability.
Analysts are also interested in the company's current financial position. Financial position can be measured by comparing the resources controlled by the company in relation to the claims (obligations) for these resources. An example of such a resource would be cash. This money can be used by the company to pay an obligation to the supplier (a claim against the company) and can also be used to make payments to the owner (who also has claims against the company because of the profits that have been earned). Financial position is especially important in credit analysis.
In conducting financial analysis of a company, the analyst will regularly refer to the company's financial statements, financial notes and release schedules, and a number of other sources of information.
To conduct a financial analysis of an enterprise, you can use programs that automatically calculate financial indicators, generate tables, charts, graphs and text conclusions. An example of such programs is an online financial analysis program.
Key sources for financial analysis
To conduct a financial or credit analysis of a company, the analyst must collect a large amount of information. The nature of the information will vary depending on the individual task, but usually includes information about the economy, industry and company, as well as information about comparable companies.
Most of this information will come from outside the company, for example, this includes economic statistics, industry reports, professional publications and databasescontaining information about competitors. The company itself provides some of the basic pieces of information for analysis in its financial statements, press releasesas well as in mass media and webcasts.
Companies prepare financial statements and submit them to investors and lenders to demonstrate financial performance and financial soundness at regular intervals (annually, semi-annually, and / or quarterly). The company's financial data includes financial reports and additional informationrequired to assess the efficiency and financial position of the company.
Financial statements are the end results of an accounting record - the process that records the business of a company. They summarize this information for use by investors, lenders, analysts and others with an interest in the company's operations and financial position. In order to provide some warranty In relation to the information presented in the financial statements and the related explanations and notes, the financial statements are audited by independent auditors who express an opinion on whether the financial statements adequately represent the company's results of operations and its financial position.
Financial statements and additional information
The main financial statements that are the subject of analysis are (profit and loss), balance sheet, cash flow statement and statement of changes in equity. Income statement and cash flow statement reflect various aspects of the company's activities over a certain period of time.
Balance displays the financial position of the company at a given time. Statement of changes in equity provides additional information regarding changes in the company's financial position. IN supplement to financial statements, the company may provide other information that is useful to the financial analyst. As part of his analysis, the financial analyst should read and evaluate this additional information, which includes:
- explanations to financial statements;
- information (word) from management companies;
- external report auditor.
Figure: 1 Sources of financial information
Income statement
The statement of financial results provides information about the financial results of a company's business over a certain period of time. The income statement reports how much income the company received during the period and what expenses it incurred in connection with the operations that generated the income. Net income (revenue minus all costs) in the income statement is often referred to as the “bottom line” because of its proximity to the bottom of the income statement.
The income statements are presented on a consolidated basis, which means that they include income and expenses subsidiaries under the control of the parent company. The statement of financial performance is sometimes referred to as an activity or income statement. The basic equation underlying the income statement is:
Income - expenses \u003d net profit (cumulative financial result of the period)
Information about profit and loss represents the most recent year in the first column and the earliest year in the last column. While this is a general idea, analysts should be careful when reading income information as there are times when years can be listed from the base year to the final year.
Companies will present their basic and diluted earnings per share at the bottom of their income statement. Earnings per share is net income divided by the number of shares outstanding during the period. Basic earnings per share uses the weighted average number of ordinary shares that were actually outstanding during the period, while diluted earnings per share uses diluted shares - the number of shares that would be in circulation if the potential claims on ordinary shares (for example, stock options) were exercised by their holders.
In the process of analyzing the statement of financial results, it is worth considering the dynamics of income and expenses and answering the following questions:
- Is the change in income due to a change in units sold, a change in prices, or some combination of these factors?
- Is the cost management process efficient?
- How does the company compare to other companies in the industry?
In answering these questions, the analyst must collect, analyze, and interpret facts from a variety of sources, including the income statement.
Company balance
Accounting balance (also known as the statement of financial position or statement of financial position) presents the current financial position of a company by disclosing the resources at its disposal and the sources of their financing, both equity and debt. Equity represents the excess of assets over liabilities.
This amount that belongs to the owners or shareholders of the business; it is the residual interest in the assets of the entity after deducting its liabilities. The three parts of the balance sheet are linked in an accounting relationship known as an accounting equation:
Assets = Commitments + Capital owners (that is, the total amount of assets should be balanced by the same amount of liabilities and equity of the owners).
On the other hand, the three parts of the balance sheet equation can be formulated as equity, that is:
Assets – Commitments = Owners' capital
Using the balance sheet and applying the analysis of financial statements allows the analyst to answer questions such as:
- Does the company have sufficient liquidity (ability to meet short-term obligations), has the company's condition improved?
- Is the company resilient enough (does it have enough reliable resources to meet its obligations)?
- What is the company's financial position in relation to the industry as a whole?
Cash flow statement
While the income statement and balance sheet provide a measure of a company's success in terms of performance and financial position, cash flow is also a vital aspect to the company's long-term success. Disclosure of funding sources and the use of cash helps lenders, investors and other reporting users assess a company's liquidity, solvency, and financial flexibility.
Financial flexibility is the ability to respond and adapt to new financial risks and opportunities. Report Cash flow classifies all of the company's cash flows from operating, investing and financing activities. Operating activities include operations that generate net income and are primarily activities that involve the daily business functions of a company.
Investment activities are those activities that involve the acquisition and disposal of long-term assets such as equipment. Financing are those activities that are associated with the receipt or repayment of capital for use in a business.
In line " operating room activities ”statement of cash flows, the company reconciles its net income with net cash from operating activities. This highlights the difference between the statement of income and the statement of cash flows. Income in the income statement is displayed when it is earned, and this does not necessarily occur when funds are received.
The cash flow statement represents another aspect of an enterprise's performance: the company's ability to generate cash flows from the operation of the business. Ideally, the analyst would like to see that the main source of positive cash flow is from operating activities (and not from investing or financing activities).
Statement of changes in equity
The income statement, balance sheet and cash flow statements are the main financial statements used to assess a company's performance and financial position. A fourth financial statement is also available and is variously referred to as a statement of changes in equity, statement of changes in equity in owners, statement of share capital, or statement of retained earnings. This document primarily serves to inform about changes in the field of investments of owners in the business over time and helps the analyst to understand the changes in equity in the balance sheet.
Explanations to the balance sheet and income statement
Companies can also add explanations to the balance sheet and income statement in their financial statements. As an example, financial explanations can detail previous reporting forms and also provide explanatory information about the following:
- Business acquisitions
- Contingencies and liabilities
- Judicial production
- Options for shares and other employee benefit plans
- Operations with related parties
- Significant customers
- Subsequent events
- Business and geographic segments
- Quarterly financial data
In addition, the notes may contain information about the methods and techniques used to prepare the financial statements. The comparability of financial statements is a critical requirement for objective financial analysis. A financial statement is comparable when information is measured and displayed in a similar manner. Comparability allows the analyst to identify and analyze the real differences between an economic agent and other companies.
The International Accounting Standards Board in London sets the standards according to which international financial statements should be prepared. They are called International Financial Reporting Standards (IFRS). When comparing financial statements prepared in accordance with IFRS and a domestic company, the analyst should understand the differences in these standards, which may affect, for example, the period in which the statement of financial results is drawn up. In addition, some principles require the use of estimates and assumptions in determining performance and financial condition.
This flexibility is necessary because, ideally, the company will choose those methods, estimates and assumptions within principles that fairly reflect the unique economic environment of the company's business and industry. While this flexibility in accounting principles supposedly meets the different needs of many businesses, it poses challenges for the analyst as comparability is lost.
For example, if a company purchases a piece of equipment for use in its operations, accounting standards require that the value of the asset be reported as an expense on a systematic basis over the life of the equipment (the equipment is estimated to be used). This allocation of value is called depreciation.
The standards allow for a great deal of flexibility in determining how the flow rate is determined in each period. Two companies may acquire similar equipment, but use different methods and assumptions to record costs over time. By comparing the performance of these companies directly, it is possible to formulate the wrong conclusion about the financial performance of companies.
The accounting policies of the company (methods, estimates and assumptions) are usually also presented in the notes to the financial statements. A note containing a summary of significant accounting policies shows, for example, how the company recognizes its income and how capital assets are impaired. Analysts should be aware of the methods, estimates and assumptions used by the company to determine whether they are similar to those of other companies that are used as benchmarks. If they are not similar, then an analyst who understands accounting practices can make adjustments to make the financial statements more comparable.
Auditor's report
Financial statements submitted to a company are often required to be audited (reviewed) independent accounting firm, which then gives an opinion on the financial statements. An audit may be required by contractual agreement between the participants, law or regulation.
Just as there are standards for the preparation of financial statements, there are standards for auditing and for the expression of an opinion by the auditor. International Standards on Auditing were developed by the International Standards on Auditing and Assurance Committee of the International Federation of Accountants. These standards have been adopted by many countries. In accordance with International Standard on Auditing 200:
The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with applicable financial reporting practice.
Public companies may also be subject to requirements set by regulators or stock exchanges, such as the appointment of an independent board audit committee to oversee the audit process. The audit process provides the basis for an independent auditor to express an auditor's opinion on the reliability of the financial statements that have been audited.
Since the audit is designed and performed using audit sampling techniques, independent auditors cannot express their opinion, which provides absolute confidence in the accuracy and reliability of the financial statements. Instead, an independent auditor's report provides reasonable assurance that the financial statements are fairly presented, which means that there is a high degree of probability that the audited financial statements are free from material errors, fraud or illegal activities that have a direct impact on the financial statements.
Standard independent audit a report for a public company usually has several points within the framework of international auditing standards. The first or "introductory" clause describes the financial statements that have been audited and the responsibilities of both the management and the independent auditor.
The second paragraph describes the nature of the audit process and serves as the basis for the auditor's opinion on confidence in the reliability of the financial statements. The third or "opinion" clause expresses the auditor's opinion on the reliability of these financial statements. The unconditional auditor's report indicates that the financial statements are “fair and objective” in accordance with applicable accounting standards. This type of opinion is often referred to as overwhelmingly positive and is exactly what analysts would like to see in a financial statement.
There are several other types of opinions. The modified auditor's report contains some limitations or exceptions to accounting standards. The exceptions are described in the audit report with additional explanatory clauses so that the analyst can determine the importance of the exception. A negative auditor's report arises when the financial statements deviate materially from accounting standards and are unfairly presented.
Negative opinion (False auditor's report) makes the analysis of financial statements easy: do not worry, because the data of the company's financial statements cannot be relied on. Finally, a disclaimer occurs when, for whatever reason, the auditors are unable to present their opinion.
Auditors can also express their opinion on the company's internal control systems. This information can be presented in a separate opinion or included as another item in the auditor's report related to financial reporting. The internal control system is the internal system of the company, which is designed, among other things, to ensure that the process of creating financial statements is of high quality and predictable. Public companies are usually required to:
- Take responsibility for the effectiveness of internal controls.
- Assess the effectiveness of the internal control system using the appropriate control criteria.
- Support the assessment process with sufficient and competent evidence.
- Submit an internal control report.
While these reports provide some assurance for analysts, they are not infallible. The analyst should always be treated with a grain of salt when analyzing financial statements.
Other sources of information
The information above is generally provided to shareholders on an annual basis. Interim reports are also provided by the company either twice a year or quarterly. Interim reports generally represent the financial condition of the company, but they are not audited. These interim reports can provide updated information on the results of operations and financial position of the company since the last annual period.
Companies may also provide relevant current information on their websites and press releases, as well as in the business media. When analyzing financial statements, analysts should consider all of these sources of company information, as well as information from external sources regarding the economy, industry, the company itself and comparable companies.
Information on the economy, sphere activities, as well as similar companies is useful in analyzing the financial performance of a company and determining its condition and prospects for the near future.
Figure: 2 Steps in the financial analysis process
Analysts work in various positions. For example, the main goal of stock analysts is to assess the potential equity (shares) of an investment in order to determine if an investment is attractive and promising and what is a suitable purchase price. Others credit analyststhat assess the creditworthiness of a company in order to decide whether (and what timing) a loan should be made or what a credit rating should be assigned.
Analysts may also be involved in a variety of other tasks, such as evaluating the performance of a subsidiary, evaluating direct investments, or finding stocks that are overvalued for the purpose of taking a short position. This section provides a general framework for analyzing financial statements that can be used in these various tasks.
Table 1 - The process of financial analysis of the company
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Information sources |
Result |
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1. Formation of the purpose and context of the analysis. |
The nature of the analyst's function, such as evaluating equity or debt investments or generating a credit rating. Communication with the client or supervisor about the needs and concerns of the company. |
Determination of the purpose or objectives of the analysis. A list (in writing or orally) consisting of specific questions to be answered during the analysis. Presentation of the content of the result of financial analysis. Schedule and budgetary resources to complete the financial analysis. |
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2. Collection of data. |
Financial statements, other financial data, questionnaires, and industrial / economic data. Discussion with management, suppliers, customers and competitors. Visits to the company (for example, to production facilities or to retail stores). |
Analytical financial reporting. Financial data tables. Completed questionnaires, if applicable. |
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3. Data processing. |
The data obtained in the previous step. |
Adjusted financial statements. Odds and graphs. Forecasts. |
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Input data as well as processed data. |
Analytical results. |
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Analytical results and previous reports. |
An analytical report that answers the questions asked in stage 1. |
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6. Follow-up action. |
Information collected from time to time as needed to determine if changes to findings or recommendations are needed. |
Formation of the purpose and context of the analysis.
Before undertaking any analysis, it is important to understand the purpose of the specific analysis. Understanding goals is especially important in analyzing financial statements due to the many methods available and the sheer volume of data.
Some analytical tasks are clearly defined, in which case articulating the purpose of the analysis does not require the analyst to make decisions. For example, periodic review investment and debt portfolio or stock market analyst report for a particular company can be carried out in accordance with the requirements of institutional standards, that is, the requirements are set out in regulatory acts, for example, in the Methodological Guidelines for analyzing the financial condition of organizations. In addition, the format, procedures and / or sources of information may also be suggested in domestic regulations.
For other analytical tasks, the formulation of the goal of the analysis requires additional decision making from the analyst. The purpose of the analysis determines further decisions about approaches, tools, data sources, formats in which to report the results of the analysis, and the relative importance of various aspects of the analysis.
When there is a significant amount of data, the less experienced analyst can simply start processing the numbers and creating the output. It is generally desirable to resist this temptation and thereby avoid a large amount of low informative data. Consider the questions: If you were getting too much data, what would be your conclusion? What questions would you be able to answer? Which solution will support your answer?
The analyst must also define the context at this stage. Who is the target audience? What is the final product - for example, a final report that will explain the findings and recommendations? What is the selected time frame (for what period will the financial research be carried out)? What resources and resource constraints are relevant to the analysis process? Again, the context can be predefined (i.e., a standard one that is determined by institutional norms).
Having clarified the purpose and context of the analysis of financial statements, the analyst must formulate specific questions that will be answered in the process of financial analysis. For example, if the purpose of a financial statement analysis (or rather a specific step in a broader analysis) is to compare the historical performance of three companies operating in a given industry, specific questions would include: What was the relative growth rate of the companies, and what is the relative profitability of companies? Which of the companies shows the highest financial result, and which is the least effective.
Data collection.
Next, the analyst receives the data necessary to answer specific questions. A key part of this stage is understanding the company's business, financial performance and financial position (including trends over time and compared to peers). For historical analysis, financial statements alone are sufficient in some cases.
For example, to enumerate a large number of alternative companies with a certain minimum level of profitability, only financial reporting data will be sufficient. But more information is needed to address deeper questions, such as why and how one company performed better or worse than its competitors.
As another example, it can be said that to compare the historical performance of two companies in a particular industry, historical financial statements will be sufficient to determine which company was the fastest growing, and which company would be more profitable to invest in; however, a broader comparison with overall industry growth and profitability would obviously require industry data.
In addition, information on economics and industry is essential to understand the environment in which a company operates. Analysts often take a top-down approach in which they (1) gain insight into macroeconomic environment, economic growth and inflation prospects, (2) analyze perspectives development of the industry in which the company operates, and (3) determine the company's prospects in the expected industries and the macroeconomic environment. For example, an analyst might want to forecast future profit growth for a company.
To predict future growth, company history provides only one piece of information for statistical forecasting; however, an understanding of economic and industry conditions can improve the analyst's ability to forecast company revenues based on forecasts of overall economic and industry performance.
Data processing.
After receiving the necessary financial statements and other information, the analyst processes this data using appropriate analytical tools. For example, processing the data may include calculating growth rates or rates; preparation of horizontal and vertical analysis of financial statements; creating diagrams; performing statistical analyzes such as regression or Monte Carlo simulations; assessment of equity participation; sensitivity analysis; use of any other analytical tools or combination of tools that are available and appropriate for the tasks. A comprehensive financial analysis at this stage will include the following:
- reading and evaluating financial statements for each company subject to analysis. This stage includes studying the accounting in the company, what methods were used (for example, when when generating information about income in the income statement), and what operational decisions were made, which may affect the financial statements presented (for example, leasing on equipment purchase).
- making any necessary adjustments to the financial statements to facilitate comparison when the unadjusted statements of the companies in question reflect differences in accounting standards, operating decisions, etc.
- preparation or collection of data for financial statements and financial ratios (which are indicators of various aspects of corporate efficiency and are determined based on the elements of the company's financial statements). Based on horizontal-vertical analysis of financial statements and financial performance, analysts can assess the relative profitability, liquidity, leverage, performance and valuation of a company in relation to past performance and / or competitor performance.
Analysis / interpretation of processed data.
After the data has been processed, the next step takes place, which is critical for any analysis - the interpretation of the output. The answer to a specific question in financial analysis is rarely in the form of a single number; the answer to the analytical question is based on the interpretation of the results of the calculation of indicators and is used to form conclusions or recommendations. Answers to specific analytical questions may be the goal of financial analysis, but, as a rule, an opinion or recommendation is required from the analyst.
Writing a conclusion or recommendations in an appropriate format is the next step in the analysis. The appropriate format will vary depending on the analytical task, institution or audience. For example, an investment analyst report typically includes the following components:
- Summing up and investment conclusion
- Business resume
- Risks
- Assessment
- Historical and other data
The results should present those key factors that are important in justifying investment recommendations. An important part of this requirement is the distinction between the analyst's opinion and the facts. When preparing a report, it is necessary to present the main characteristics of the analyzed security, which will allow the reader to evaluate the report and include the analyst's information in his own investment process and decision-making.
ROSP requires disclosure of all the limitations of the analysis and any risks inherent in the investment. In addition, the ROSP requires any report to include elements that are important for analysis and conclusions, which will enable readers of the financial analysis to determine the quality of the conclusions.
Follow-up action.
The process does not end with reporting. If equity investments have been made or a credit rating has been assigned, a periodic review of the object of financial analysis is necessary in order to determine if the initial findings and recommendations are current. In the event of investment rejection, follow-up monitoring is not necessary, but it may be advisable to determine the effectiveness of the review process (for example, if the rejected investment proves to be effective and attractive). The follow-up to financial analysis may include repeating all of the steps above.
The structure of the financial statement review process provides steps that can be taken in any financial statement review project, including:
- Formulation of the purpose and context of the analysis.
- Collection of initial data.
- Data processing.
- Analysis / interpretation of processed data.
- Formation of conclusions and recommendations.
- Follow-up action.
List of sources used
Thomas R. Robinson, International financial statement analysis / Wiley, 2008, 188 pp.
Kogdenko V.G., Economic analysis / Textbook. - 2nd ed., Rev. and add. - M .: Unity-Dana, 2011 .-- 399 p.
Buzyrev V.V., Nuzhina I.P. Analysis and diagnostics of financial and economic activities of a construction company / Textbook. - M .: KnoRus, 2016 .-- 332 p.
Financial analysis is an important element of financial management. To ensure the effectiveness of the organization in modern conditions, the management must be able to realistically assess the financial condition of their organization, as well as the financial condition of partners and competitors.
Financial condition - a complex concept, which is characterized by a system of indicators reflecting the availability, placement and use of the organization's financial resources.
In practice, it often happens that a well-functioning organization experiences financial difficulties associated with insufficient rational allocation and use of available financial resources. Therefore, financial activities should be aimed at ensuring the systematic receipt and effective use of financial resources, compliance with settlement and credit discipline, achieving a rational ratio of own and borrowed funds, financial stability in order to effectively operate the organization. Analysis plays an essential role in achieving a stable financial position.
With the help of financial analysis, decisions are made on:
short-term financing of the organization (replenishment of current assets);
long-term financing (investment of capital in efficient investment projects and equity securities);
payment of dividends to shareholders;
mobilizing reserves for economic growth (growth in sales and profits).
The main goal of financial analysis is to obtain a certain number of basic parameters that give an objective and reasonable characterization of the financial condition of the organization. These are, first of all, changes in the structure of assets and liabilities, in settlements with debtors and creditors, in profit and loss.
The main objectives of financial analysis:
determination of the financial condition of the organization;
identification of changes in the financial condition in space and time;
identification of the main factors causing changes in financial condition;
forecast of the main trends in the financial condition.
The alternativeness of the goals of financial analysis depends on its time limits, as well as on the goals set by the users of financial information.
The research objectives are achieved by solving a number tasks:
Preliminary review of financial statements.
Description of the organization's property: non-current and circulating assets.
Assessment of financial stability.
Characteristics of sources of funds (own and borrowed).
Analysis of profit and profitability.
Development of measures to improve the financial and economic activities of the organization.
These tasks express the specific goals of the analysis, taking into account the organizational, technical and methodological possibilities of its implementation. As a result, the main factors are the volume and quality of analytical information.
The main principle of studying analytical indicators is the deductive method (from general to specific).
Financial analysis is part of a general, complete analysis of economic activities, which consists of two closely interrelated sections:
The financial analysis.
Management (production) analysis.
The division of analysis into financial and management is due to the existing in practice division of the accounting system into financial and management accounting. The main sign of separation of analysis into external and internal is the nature of the information used.
External analysis based on published reporting data, i.e. on a very limited part of information about the activities of the organization, which is the property of the entire society. The main source of information for external analysis is the balance sheet and its annexes.
Internal analysis uses all the information about the state of affairs in the organization, including information available only to a limited number of people leading the organization.
Business Analysis Schemeorganization
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Analysis of economic activities | |||||||||||||
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Management analysis |
The financial analysis | ||||||||||||
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Internal production analysis |
Internal financial analysis |
External financial analysis |
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Analysis in the justification and implementation of business plans |
Analysis of the efficiency of capital advance | ||||||||||||
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Analysis in the marketing system |
Analysis of absolute profit indicators | ||||||||||||
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Comprehensive economic analysis of the efficiency of economic activities |
Analysis of relative profitability indicators | ||||||||||||
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Analysis of production conditions |
Analysis of liquidity, solvency and financial stability | ||||||||||||
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Analysis of the use of production resources |
Analysis of the use of equity capital | ||||||||||||
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Analysis of production volume |
Analysis of the use of borrowed funds | ||||||||||||
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Analysis of production costs | |||||||||||||
The division of analysis into internal and external is also associated with the goals and objectives of each of them. External analysis tasks are determined by the interests of the users of the analytical material.
Internal financial analysis aims to a deeper study of the reasons for the current financial condition, the efficiency of the use of fixed and circulating assets, the relationship of indicators of the volume of production (sales), cost and profit. For this, additional financial accounting data (regulatory and planning information) are used as sources of information.
Exclusively internal is management analysis... It uses the entire range of economic information, is operational in nature and is completely subordinate to the will of the organization's management. Only such an analysis allows us to realistically assess the state of affairs in the organization, to study the structure of the cost of not only all manufactured and sold products, but also its individual types, the composition of commercial and administrative expenses, and especially carefully examine the nature of the responsibility of officials for the implementation of the business plan.
Management analysis data play a decisive role in the development of the most important issues of the organization's competition policy: improving technology and organization of production, creating a mechanism for achieving maximum profit. Therefore, the results of the management analysis are not subject to publicity, they are used by the organization's management to make managerial decisions, both operational and prospective.
More clearly the differences between the characteristics of financial and management analysis are presented in Table 1.
The financial analysis is a method of assessing and forecasting the financial condition of an enterprise based on its financial statements.
The financial analysis - This is a process of researching the financial condition and the main results of the financial activities of an enterprise in order to identify reserves for further increasing its market value.
This kind of analysis can be performed both by the management personnel of a given enterprise and by any external analyst, since it is mainly based on publicly available information.
The basis of information support financial analysis, as noted above, must draw up financial statements. Of course, the analysis can use additional information, mainly of an operational nature, but it is only auxiliary in nature.
As the main sources of information for financial analysis can be used:
1. External data (- the state of the economy, financial sector, political and economic state; - exchange rates; - securities rates, yield on securities; - alternative returns; - indicators of the financial condition of other companies;)
2. Internal data (-Accounting; -Management reporting.)
The main purpose financial analysis is to obtain a small number of key (most informative) parameters that give an objective and accurate picture of the financial condition of the enterprise, its profits and losses, changes in the structure of assets and liabilities, in settlements with debtors and creditors.
As a result of financial analysis, both the current financial condition of the enterprise and the parameters of the financial condition expected in the future are determined.
Thus, financial analysis can be defined as a way of accumulating, transforming and using information of a financial nature, which has target :
- assess the current and future financial condition of the enterprise;
- assess the possible and expedient rates of development of the enterprise from the standpoint of their financial support;
- identify available sources of funds and assess the possibility and feasibility of their mobilization;
- predict the position of the enterprise in the capital market.
The goals of financial analysis are achieved as a result of solving a certain interrelated set of analytical tasks
Financial analysis tasks:
1. Analysis of assets (property) .2. Analysis of funding sources. 3. Analysis of solvency (liquidity). 4. Financial stability analysis 5. Analysis of financial results and profitability. 6. Analysis of business activity (turnover) .7. Cash flow analysis 8. Analysis of investments and capital investments. 9. Market value analysis 10. Analysis of the likelihood of bankruptcy. 11. Comprehensive assessment of the financial condition 12. Preparation of financial forecasts 13. Preparation of conclusions and recommendations.
Types of fin. Analysis:
1) depends. From organizational forms of conducting: internal, external (Internal analysis is carried out by employees of the enterprise. The information base of such analysis is much wider and includes any information circulating within the enterprise and useful for making management decisions. Accordingly, the possibilities of analysis are expanded. External financial analysis is carried out by analysts who are outsiders for the enterprise and therefore do not have access to the internal information base of the enterprise. External analysis is less detailed and more formalized.)
2) depends. From the scope of the study: full, thematic
3) depends. From the scope of analysis: for the enterprise as a whole, for a division or for a structural unit, for a separate financial. Operations
4) depends. From the period of the study: preliminary, current, subsequent
To solve specific problems of financial analysis, a whole a number of special methods , allowing you to obtain a quantitative assessment of individual aspects of the enterprise. In financial practice, depending on the methods used, the following systems of financial analysis carried out at the enterprise are distinguished: trend, structural, comparative and analysis of coefficients.
1... Trending (horizontal) financial analysis is based on the study of the dynamics of individual financial indicators over time. In the process of carrying out this analysis, the rates of growth (gain) of individual indicators are calculated and the general trends in their change (or trend) are determined. The most common forms of trend (horizontal) analysis are:
1) comparison of financial indicators of the reporting period with indicators of the previous period (for example, with indicators of the previous decade, month, quarter);
2) comparison of financial indicators of the reporting period with indicators of the same period last year (for example, indicators of the second quarter of the reporting year with similar indicators of the second quarter of the previous year). This form of analysis is used at enterprises with pronounced seasonal characteristics of economic activity;
3) comparison of financial indicators for a number of previous periods. The purpose of this analysis is to identify the trend of changes in individual indicators that characterize the results of the financial activities of the enterprise. The results of such an analysis are usually presented graphically in the form of line charts or a bar chart of changes in the indicator over time.
2... Structural (vertical) financial analysis is based on the structural decomposition of individual indicators. In the process of carrying out this analysis, the proportions of individual structural components of financial indicators are calculated. The most widespread are the following forms of structural (vertical) analysis: analysis of assets, capital, cash flows.
3. Comparative financial analysis is based on comparing the values \u200b\u200bof individual groups of similar financial indicators with each other. In the process of carrying out this analysis, the sizes of the absolute and relative deviations of the compared indicators are calculated. The most widespread forms of comparative analysis are: analysis of financial indicators of an enterprise and average industry indicators, analysis of financial indicators of a given enterprise and competing enterprises, analysis of financial indicators of individual structural units and divisions of a given enterprise, analysis of reporting and planned (normative) financial indicators:
4. Analysis of financial ratios is based on calculating the ratio of various absolute indicators to each other. In the process of carrying out this analysis, various relative indicators characterizing various aspects of financial activity are determined. The most widespread are the following aspects of such analysis: financial stability, solvency, asset turnover and profitability.
Financial Analysis: What Is It?
The financial analysis- this is the study of the main indicators of the financial condition and financial results of the organization's activities in order to make management, investment and other decisions by stakeholders. Financial analysis is part of broader terms: analysis of the financial and economic activities of an enterprise and economic analysis.
In practice, financial analysis is carried out using MS Excel tables or special programs. In the course of the analysis of financial and economic activities, both quantitative calculations of various indicators, ratios, coefficients, and their qualitative assessment and description, comparison with similar indicators of other enterprises are made. Financial analysis includes an analysis of the assets and liabilities of the organization, its solvency, liquidity, financial results and financial stability, an analysis of asset turnover (business activity). Financial analysis reveals such important aspects as the possible likelihood of bankruptcy. Financial analysis is an integral part of the activities of specialists such as auditors, appraisers. Financial analysis is actively used by banks, deciding the issue of issuing loans to organizations, an accountant in the course of preparing an explanatory note for annual reporting, and other specialists.
Fundamentals of Financial Analysis
Financial analysis is based on the calculation of special indicators, more often in the form of coefficients characterizing one or another aspect of the financial and economic activities of the organization. Among the most popular financial ratios are the following:
1) Ratio of autonomy (the ratio of equity to the total capital (assets) of the enterprise), the ratio of financial dependence (the ratio of liabilities to assets).
2) Current liquidity ratio (the ratio of current assets to short-term liabilities).
3) Quick ratio (the ratio of liquid assets, including cash, short-term financial investments, short-term receivables, to short-term liabilities).
4) Return on equity (the ratio of net profit to equity of the enterprise)
5) Profitability of sales (the ratio of profit from sales (gross profit) to the company's revenue), by net profit (the ratio of net profit to revenue).
Financial analysis techniques
The following methods of financial analysis are commonly used: vertical analysis (for example), horizontal analysis, predictive analysis based on trends, factorial and other analysis methods.
Among the legally (normatively) approved approaches to financial analysis and methods, the following documents can be cited:
- Order of the Federal Office for Insolvency (Bankruptcy) of 12.08.1994 N 31-r
- Resolution of the Government of the Russian Federation of June 25, 2003 N 367 "On Approval of the Rules for Conducting Financial Analysis by an Insolvency Administrator"
- Regulation of the Central Bank of Russia dated June 19, 2009 N 337-P "On the procedure and criteria for assessing the financial position of legal entities - founders (participants) of a credit institution"
- Order of the FSFR of the Russian Federation of January 23, 2001 N 16 "On approval of" Methodological instructions for analyzing the financial condition of organizations "
- Order of the Ministry of Economy of the Russian Federation of 01.10.1997 N 118 "On Approval of Methodological Recommendations for the Reform of Enterprises (Organizations)"
It is important to note that financial analysis is not just about calculating various indicators and ratios, comparing their values \u200b\u200bin statics and dynamics. The result of a qualitative analysis should be a reasonable, calculated conclusion about the financial position of the organization, which will become the basis for decision-making by management, investors and other interested parties (see example). It was this principle that served as the basis for the development of the program "Your Financial Analyst", which not only prepares a full report on the results of the analysis, but also does it without the participation of the user, without requiring him to have knowledge of financial analysis - this greatly simplifies the life of accountants, auditors, economists ...
Sources of information for financial analysis
Very often, stakeholders do not have access to the internal data of the organization, therefore, the organization's public accounting statements serve as the main source of information for financial analysis. The main reporting forms - Balance Sheet and Profit and Loss Statement - make it possible to calculate all the main financial indicators and ratios. For a more in-depth analysis, you can use the statements of cash flows and capital of the organization, which are compiled at the end of the financial year. An even more detailed analysis of individual aspects of an enterprise's activities, for example, calculating a break-even point, requires source data that lies outside the reporting (data of current accounting and production accounting).
For example, you can get a financial analysis based on your Balance Sheet and Profit and Loss Statement for free online on our website (both for one period and for several quarters or years).
Altman Z-model (Altman Z-score)
Altman Z-model (Altman Z-score, Altman Z-Score) is a financial model (formula) developed by the American economist Edward Altman, designed to predict the likelihood of bankruptcy of an enterprise.
Enterprise analysis
Under the expression " enterprise analysis"usually means financial (financial and economic) analysis, or a broader concept, the analysis of the economic activity of the enterprise (AHD). Financial analysis, the analysis of economic activity refers to microeconomic analysis, ie the analysis of enterprises as separate subjects of economic activity (as opposed to macroeconomic analysis, which involves the study of the economy as a whole).
Business Analysis (AHD)
Via business analysis organizations study general trends in the development of the enterprise, investigate the reasons for changes in the results of activities, develop and approve plans for the development of the enterprise and make management decisions, monitor the implementation of approved plans and decisions, identify reserves in order to improve production efficiency, evaluate the results of the firm, develop an economic strategy its development.
Bankruptcy (Bankruptcy Analysis)
Bankruptcy, or insolvency- this is the inability of the debtor recognized by the arbitration court to fully satisfy the creditors' claims for monetary obligations and (or) to fulfill the obligation to pay mandatory payments. The definition, basic concepts and procedures related to the bankruptcy of enterprises (legal entities) are contained in the Federal Law of 26.10.2002 N 127-FZ "On Insolvency (Bankruptcy)".
Vertical analysis of reporting
Vertical analysis of reporting - the technique of analysis of financial statements, in which the ratio of the selected indicator with other homogeneous indicators within one reporting period is studied.
Horizontal analysis of reporting
Horizontal analysis of reporting is a comparative analysis of financial data for a number of periods. This method is also known as trend analysis.
