Analysis of financial statements can be done in a number of ways that include analysis of financial ratios and prediction of the sustainable growth rate. The Altman Z score protection is also used for predicting bankruptcy.
The processes in the analysis of financial reports can be detailed as under:
Experts use this method to analyse the financial data that is available to them. The financial ratio may be the ratio between the company’s assets to its liabilities. It may also be the ratio between the accounts receivables and the annual sales.
The financial ratios assume significance only when they are compared with other companies to locate where it stands. The performance of a company is generally tracked over a period of time by comparing with other industry data.
The financial ratios basically project the positives as well the negatives of a company. Hence, sometimes it may give wrong projections. In such a situation one has to consider the economic circumstances through which the company went and also the corporate structure. Then only the actual picture will come to light.
The financial ratio does not assume a single value. It all depends on how the analysts view the problem and also the competitive strategy of the concerned company.
The financial ratio makes sense only when there is a yardstick with which it is compared. The yardstick may be the ratio trend of any company.
In the case of trend analysis, a comparison of the financial statements is done over a period of time. Trend analysis is generally made over a period of 5 years.
In cross-sectional analysis, a comparison is made between the financial ratios of two or more companies along same business lines. The best way is to compare the financial ratio of a specific company with the industry average.
Last Updated on : 26th June 2013