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Financial Analysis Assignment

This document outlines the key types of financial analysis performed by analysts. It discusses 10 main types of analysis: profitability, liquidity, horizontal, vertical, rates of return, valuation, efficiency, cash flow, leverage, and growth rates. For each type, it provides 2-4 examples of specific metrics or ratios used in that category of analysis, such as gross margin for profitability or debt-to-equity for leverage. The overall document serves as a guide to the various analytical tools and approaches used by financial professionals.

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Saifi
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355 views5 pages

Financial Analysis Assignment

This document outlines the key types of financial analysis performed by analysts. It discusses 10 main types of analysis: profitability, liquidity, horizontal, vertical, rates of return, valuation, efficiency, cash flow, leverage, and growth rates. For each type, it provides 2-4 examples of specific metrics or ratios used in that category of analysis, such as gross margin for profitability or debt-to-equity for leverage. The overall document serves as a guide to the various analytical tools and approaches used by financial professionals.

Uploaded by

Saifi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Financial Analysis

Abdul Samad Bhatti L1F17BSAF0056

Waleed Bin Khalid L1F17BSAF0070

Zaeem Asif L1F17BSAF0062

Hannan Siddiqui L1F17BSAF0067

Usair Arshad L1F17BSAF0072

Submitted to: Sir Abid Noor

Section: B
What is Financial Analysis?
Financial analysis involves using financial data to assess a company’s performance and make
recommendations about how it can improve going forward. Financial Analysts primarily
carry out their work in Excel, using a spreadsheet to analyze historical data and make
projections of how they think the company will perform in the future. This guide will cover
the most common types of financial analysis performed by professionals.

Types of Financial Analysis.


The most common types of financial analysis are:
1. Profitability
2. Liquidity
3. Horizontal
4. Vertical
5. Rates of Return
6. Valuation
7. Efficiency
8. Cash Flow
9. Leverage Analysis
10. Growth Rates

Profitability Analysis
Profitability is a type of income statement analysis where an analyst assesses how attractive
the economics of a business are. Common examples of profitability measures include:
 Gross margin
 EBITDA margin
 EBIT margin
 Net profit margin
Liquidity Analysis
This is a type of financial analysis that focuses on the balance sheet, particularly, a
company’s ability to meet short-term obligations (those due in less than a year). Common
examples of liquidity analysis include:
 Current ratio
 Acid test
 Cash ratio
 Net working capital

Horizontal Analysis
Horizontal analysis involves taking several years of financial data and comparing them to
each other to determine a growth rate. This will help an analyst determine if a company is
growing or declining, and identify important trends.
When building financial models, there will typically be at least three years of historical
financial information and five years of forecasted information. This provides 8+ years of data
to perform a meaningful trend analysis, which can be benchmarked against other companies
in the same industry.

Vertical Analysis
This type of financial analysis involves looking at various components of the income
statement and dividing them by revenue to express them as a percentage. For this exercise to
be most effective, the results should be benchmarked against other companies in the same
industry to see how well the company is performing.
This process is also sometimes called a common-sized income statement, as it allows an
analyst to compare companies of different sizes by evaluating their margins instead of their
dollars.

Rates of Return
At the end of the day, investors, lenders, and finance professionals, in general, are focused on
what type of risk-adjusted rate of return they can earn on their money. As such, assessing
rates of return on investment (ROI) is critical in the industry.
Common examples of rates of return measures include:
 Return on Equity (ROE)
 Return on Assets (ROA)
 Return on invested capital (ROIC)
 Dividend Yield
 Capital Gain
 Accounting rate of return (ARR)
 Internal Rate of Return (IRR)

Valuation Analysis
The process of estimating what a business is worth is a major component of financial
analysis, and professionals in the industry spend a great deal of time building financial
models in Excel. The value of a business can be assessed in many different ways, and
analysts need to use a combination of methods to arrive at a reasonable estimation.
Approaches to valuation include:
 Cost Approach
 The cost to build/replace
 Relative Value (market approach)
 Comparable company analysis
 Precedent transactions
 Intrinsic Value
 Discounted cash flow analysis

Efficiency Analysis
Efficiency ratios are an essential part of any robust financial analysis. These ratios look at
how well a company manages its assets and uses them to generate revenue and cash flow.
Common efficiency ratios include:
 Asset turnover ratio
 Fixed asset turnover ratio
 Cash conversion ratio
 Inventory turnover ratio

Cash Flow
As they say in finance, cash is king, and, thus, a big emphasis is placed on a company’s
ability to generate cash flow. Analysts across a wide range of finance careers spend a great
deal of time looking at companies’ cash flow profiles.
The Statement of Cash Flows is a great place to get started, including looking at each of the
three main sections: operating activities, investing activities, and financing activities.
Common examples of cash flow analysis include:
 Operating Cash Flow (OCF)
 Free Cash Flow (FCF)
 Free Cash Flow to the Firm (FCFF)
 Free Cash Flow to Equity (FCFE)

Leverage Analysis
Leverage ratios are one of the most common methods analysts use to evaluate company
performance. A single financial metric, like total debt, may not be that insightful on its own,
so it’s helpful to compare it to a company’s total equity to get a full picture of the capital
structure. The result is the debt/equity ratio.
Common examples of ratios include:
 Debt/equity
 Debt/EBITDA
 EBIT/interest (interest coverage)
 Dupont analysis – a combination of ratios, often referred to as the pyramid of ratios,
including leverage and liquidity analysis

Growth Rates
Analyzing historical growth rates and projecting future ones are a big part of any financial
analyst’s job. Common examples of analyzing growth include:
 Year-over-year (YoY)
 Regression analysis
 Bottom-up analysis (starting with individual drivers of revenue in the business)
 Top-down analysis (starting with market size and market share)
 Other forecasting methods.

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