The financial statements are based on a set of financial statements that reflect the activity of the organization during a specific financial period. These financial statements are issued by the management of the company and through these lists a set of financial information is disclosed to several parties within the company. Of the financial statements, such as: creditors, shareholders and investors, These statements are: income statement, statement of financial position, balance sheet, cash flow statement and statement of shareholders' equity. Those who are familiar with these lists should have the ability to understand and analyze them.
Financial analysis of financial statements
The financial analysis of the financial statements aims at clarifying the contents of the financial statements and using the figures that are disclosed in the financial statements in order to make some decisions by the beneficiaries of these lists internally or externally. The financial analysis of the financial statements is done through the horizontal analysis of the financial statements, , And financial analysis using the so-called financial ratios, can be illustrated by the following:
This type of financial analysis is called in English: Horizontal analysis,
A comparison of the financial information presented in the financial statements over the course of more than one financial year is performed through the horizontal analysis of the financial statements. This comparison shows the increase in the value of these financial statements. These financial statements may be classified as charts or graphs to facilitate comparison. Between the values of the items included in the financial statements,
The most common financial statements for which horizontal analysis is used are:
Sales, cost of goods sold, and miscellaneous expenses such as salaries and rent,
The financial analyst takes advantage of horizontal analysis as much as possible when this analysis is synchronized to more than one item. The effects of the rise and fall in the value of items in the financial statements appear on different accounts, which increases the analyst's ability to give reasonable explanations.
This type of financial analysis is called in English. Vertical analysis,
Through vertical analysis, financial statements are presented in tables within percentages, and this type of financial analysis is commonly used because it reveals the relative share of financial account balances compared to each other in the same time period. Examples of the use of vertical analysis in the income statement are Items as a percentage of total sales. The balance sheet is stated as a percentage of total assets,
One of the most important benefits of vertical analysis is that it gives explanations for expenses that are not of relative importance that management can try to avoid in future periods.
In financial ratios, some accounts are compared in the financial statement items to each other by the relative method through the numerator and denominator. These ratios give indicators of the performance of the company in view of the items contained in these financial ratios. Other competition within the same sector, and there are many types of financial ratios that assess the performance of the company, the most prominent of which are the following:
- Performance Ratios:
Performance ratios are compared to the data presented in the income statement, which give indications of the company's ability to achieve profits, the most important of which are the following:
Gross Margin Ratio = Gross Margin / Sales
Operating income ratio = Operating income / sales
Net Profit Ratio = Net Profit / Sales
- Liquidity Ratios:
Liquidity ratios show the company's ability to meet its obligations through liquidity and the most prominent liquidity ratios include:
Trading Ratio = Current Assets / Current Liabilities
Liquidity ratio = (current assets - inventory) / current liabilities
- Cash Flow Ratios:
Through which accounting misinformation is disclosed based on the accrual basis. These ratios also reveal the Company's ability to generate cash through trading activity,
The most prominent of these percentages are:
Return on Assets = (Net Profit + Non-Cash Expenses) / Total Cash Assets from Operations = Cash Flow from Operating Operations / Net Income
Cash reinvestment rate = (increase in value of fixed assets ± change in working capital) / (net income + non-cash expenses)
- Return on Investment Ratios:
Through which the return of the investors in the company is revealed. The most prominent of these percentages are the following:
Return on equity = net income / equity
Return on Assets = Net Income / Total Assets
Analysis of variance
This type of analysis is called variance analysis. Analysis of variance is a helpful factor in financial analysis. The difference between the actual amounts generated in the financial statements and the amounts planned in advance is disclosed. The cost of manufacturing is tracked by examining the standard costs of the raw materials that result from processing the manufacture of the products, in addition to studying the actual costs of raw materials for manufactured products. Therefore, the analysis of variance has a large role in detecting excess costs in order to search for their causes. FH manufacturing per unit of raw materials.
Who are the parties interested in financial analysis?
Facility management, owners of the facility, similar establishments, government agencies
B- Facility management, owners of the establishment, competing establishments, consulting offices
Facility management, owners, creditors and other entities
Facility management, similar establishments, government agencies, consultancy offices
What is financial analysis
A process whereby companies, budgets, and others are evaluated to determine their performance and suitability.
What are the types of financial analysis?
Horizontal analysisBy comparing the financial results of the Corporation for a number of consecutive reporting periods, it aims to identify any rise or fall in data that can be used as the basis for a detailed examination of the financial results.
Vertical analysisIt is a relative analysis of different expenses in the income statement, measured as a percentage of net sales, and these ratios must be consistent over time.
aFor short-term analysisA detailed analysis of working capital, including calculation of turnover of accounts receivable, accounts payable and inventory.
Comparative analysis of companiesIt includes calculating and comparing the main financial ratios of two organizations
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