ACADEMY

FINANCIAL ANALYSIS

Academy »  Financial analysis

A financial analysis is an indispensible tool of corporate financial management in market-oriented economies. Its predominant purpose is to supply information about the company´d financial health. The company´s assets are indeed captured in the firm´s accounting books which are capable of providing raw and, often, essential economic data, yet the accounting alone does not make the firm´s diagnosis. Proper book-keeping has to be followed by an analysis of its results.

The primary sources of data for the financial analysis are as follows:

• readily available data provided by financial reports, such as the balance sheet, the profit and loss statement, the cash flow statement, the annual report and the auditor´s report
• data acquired from internal sources which are not readily accessible, such as the data from financial and managerial accounting and calculations

Fundamental methods of financial analysis

A. A percentage analysis B. A ratio analysis

Procedure of financial analysis comprises the following steps:

1. Calculations of ratio indices of the company in view
2. Comparative analyses – comparing ratio indices with industrial averages
3. A trend analysis – assessing the ratio indices in time
4. Evaluation of mutual relations among the ratio indices by means of – pyramidal analyses, scoring models, default models
5. Measure proposition – as a basis for financial management and planning

Systems of indices

The company´s finacial and economic standing can be analyzed through a large number of indices. The drawback of this approach is that the individual indices have, in themselves, limited information values, for all they describe is just one segment of the firm´s activities. This is why systems of indices are being created in order to assess its overall situation; they are also called analytical systems or models of the financial analysis.

• Pyramidal analyses – they are hierarchy-structured systems of indices that serve to identify logical and economic relations among the indices through their analysis. Analyzing the Return On Equity (ROE), for instance, will show the desired focus of endeavour in increasing the company´s profitability.
• Specific systems of indices:
  • Scoring models (diagnostic models) which seek to capture the company´s financial standing (position) by means of a single synthetic index. Viewed from the perspective of time, they can be classified as the „ex post“ analyses which are retrospection-oriented and lead to learn about what has caused the current situation of the company. Quick test, for instance, enables to assess the company being analyzed with a relatively very good precision. In constructing the test, indices have been used that must not be subject to disruptive forces and, in addition, must interpret information from the financial statements in a comprehensive manner.
  • Default models (predictive models) which represent some early-warning systems, for they indicate potential threats to the company by following the performance of selected indices. The objective of the „ex ante“ analysis is to predict how the company will be progressing in the next 3 to 5 years, to point to possible threats to its financial health well in advance, and to forecast more serious economic difficulties or even the company´s bankruptcy. The Altman model

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