Financial analysis: what is it and why is it necessary

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:47

In the face of fierce competition, companies constantly have to fight for survival. To stay afloat, it is not enough to find and occupy a free market niche, you need to maintain and constantly improve your position. In order to solve these problems, companies should regularly conduct a financial analysis of their activities. Conducting a qualitative study will not solve all the problems of the enterprise, but will provide specific information about the strengths and weaknesses that can be effectively used.

Financial analysis - what is it? This is an assessment method that allows you to determine the sustainability of an enterprise by calculating indicators, on the basis of which a conclusion is made about the results of the company's activities in the present and forecasts for the future. During the study, coefficients are calculated, subdivided into several groups depending on the direction of the assessment.

You need to know in order to independently analyze what the main financial indicators are and how to calculate them correctly.

Coefficients used for evaluationactivities of the enterprise are included in 4 main groups of indicators:

• Liquidity ratios. They determine the financial stability of the company in a short time by calculating the degree of mobility of assets and their relationship with each other.
• Solvency ratios. They determine financial stability in the future and characterize the structure of equity and debt capital.
• Profitability ratios. They determine the effectiveness of the use of capital, investments and the activities of the company as a whole.
• Turnover ratios. Determine the cost recovery for the production cycle and the intensity of use of funds.

Each of the listed groups includes many indicators, but to study the company's performance, it is enough to apply the main ones, of which there are about three dozen.

They are determined according to data taken from the most important reporting documents: the balance sheet and its appendix, the income statement.

In addition to the output of individual indicators and ratios, factor analysis is used to study the state of affairs of the company, which consists in compiling an economic model that takes into account the relationship of the coefficients with each other and its impact on the final result.

The use of factor analysis in the economy allows you to identify more accurate results and positively influence managerial decision-making.

Effective outcome researchenterprise involves not only the calculation of the most important indicators, but also the correct use of the data obtained.

Analysis of the company's activities is carried out by the analytical department. However, in some cases, the participation of auditors is required. Experts will explain, having calculated indicators of financial stability and carried out an analysis, that such a study must be carried out regularly in order to see the dynamics. Thus, it is possible to identify such important factors as the growth rate of gross output, the amount of own working capital and others.

Specialists will decipher, after analyzing, what is the profitability and solvency of the company, what are the investment risks, how to use assets correctly and as efficiently as possible.

Based on the data received, an analytical report is drawn up containing information on the results of the analysis, as well as recommendations, following which will improve the state of the company.