This document provides an overview of financial analysis. It defines financial analysis as evaluating businesses, projects, budgets, and transactions to determine performance and suitability for investment. The document outlines different types of financial analysis including corporate analysis, investment analysis, fundamental analysis, ratio analysis, and technical analysis. It describes various ratio analyses that can be used like liquidity, solvency, efficiency, and profitability ratios. Technical analysis uses statistical trends from market activity like moving averages to predict future price movements. Trend analysis also attempts to predict prices based on recent trends.
This document provides an overview of financial analysis. It defines financial analysis as evaluating businesses, projects, budgets, and transactions to determine performance and suitability for investment. The document outlines different types of financial analysis including corporate analysis, investment analysis, fundamental analysis, ratio analysis, and technical analysis. It describes various ratio analyses that can be used like liquidity, solvency, efficiency, and profitability ratios. Technical analysis uses statistical trends from market activity like moving averages to predict future price movements. Trend analysis also attempts to predict prices based on recent trends.
This document provides an overview of financial analysis. It defines financial analysis as evaluating businesses, projects, budgets, and transactions to determine performance and suitability for investment. The document outlines different types of financial analysis including corporate analysis, investment analysis, fundamental analysis, ratio analysis, and technical analysis. It describes various ratio analyses that can be used like liquidity, solvency, efficiency, and profitability ratios. Technical analysis uses statistical trends from market activity like moving averages to predict future price movements. Trend analysis also attempts to predict prices based on recent trends.
This document provides an overview of financial analysis. It defines financial analysis as evaluating businesses, projects, budgets, and transactions to determine performance and suitability for investment. The document outlines different types of financial analysis including corporate analysis, investment analysis, fundamental analysis, ratio analysis, and technical analysis. It describes various ratio analyses that can be used like liquidity, solvency, efficiency, and profitability ratios. Technical analysis uses statistical trends from market activity like moving averages to predict future price movements. Trend analysis also attempts to predict prices based on recent trends.
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BASIC FINANCIAL ANALYSIS
Christian Neil A. Ramos, MBA, CIA
Faculty, BSBA – Financial Management OUTLINE
◦ Definition of Financial Analysis?
◦ Corporate Financial Analysis ◦ Investment Financial Analysis ◦ Types of Financial Analysis ◦ Fundamental Analysis ◦ Ratio Analysis ◦ Technical Analysis ◦ Trend Analysis Financial Analysis
◦ Financial analysis is the process of evaluating businesses, projects, budgets, and other finance- related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.
◦ Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. Corporate Financial Analysis
◦ In corporate finance, the analysis is conducted internally by the accounting department and shared with management in order to improve business decision-making. This type of internal analysis may include ratios such as net present value (NPV) and internal rate of return (IRR) to find projects worth executing. ◦ A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin, into an estimate of the company's future performance. This type of historical trend analysis is beneficial to identify seasonal trends. Investment Financial Analysis
◦ An analysis for investment purposes that can be conducted through a top-down or bottom-up investment approach.
◦ A top-down approach first looks for macroeconomic opportunities, such as high-performing
sectors, and then drills down to find the best companies within that sector. ◦ A bottom-up approach, on the other hand, looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis, looking at past performance and expected future performance as investment indicators. Main Types of Financial Analysis
There are two types of financial analysis: fundamental analysis and technical analysis.
Fundamental Analysis
Fundamental Analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. Fundamental Analysis
Ratio Analysis ◦ Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement. Ratio analysis is a cornerstone of fundamental equity analysis. ◦ Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency. Types of Ratio Analysis
1. Liquidity Ratios. Measure a company’s ability to pay off its short-term debts as they become due, using the company’s current or quick assets. These ratios indicate the company’s cash level, liquidity position, and capacity to meet its short-term liabilities. The formula of some of the major liquidity ratios are:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities Cash Ratio = Cash & Cash Equivalents / Current Liabilities Types of Ratio Analysis
2. Solvency Ratios. Also called financial leverage ratios, solvency ratios compare a company's debt levels with its assets, equity, and earnings, to evaluate the likelihood of a company staying afloat over the long haul, by paying off its long-term debt as well as the interest on its debt. These ratios indicate whether the company has the capability to meet its long-term obligations by comparing its debt level with its assets and equity etc. The formula of some of the major solvency ratios are: Debt-To-Equity Ratio = Total Debt / Total Equity Debt Ratio = Total Debt / Total Assets Interest Coverage Ratio = EBITDA / Interest Expense Types of Ratio Analysis
3. Efficiency Ratios. Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets and liabilities to generate sales and maximize profits. These ratios indicate how efficiently a company is able to utilize its available assets or convert its inventories to cash. The formula of some of the major efficiency ratios are:
Receivables Turnover Ratio = Sales / Accounts Receivable
Inventory Turnover Ratio = COGS / Inventories Payable Turnover Ratio = COGS / Accounts Payable Asset Turnover Ratio = Sales / Total Assets Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets Equity Turnover Ratio = Sales / Total Equity Types of Ratio Analysis
4. Profitability Ratios. Profitability ratios assess a company's ability to earn profits from its sales or operations, balance sheet assets, or shareholders' equity. These ratios demonstrate a company’s efficiency to use its assets to generate profits. The formula of some of the major profitability ratios are:
Gross Margin = (Sales – COGS) / Sales
Operating Profit Margin = EBIT / Sales Net Margin = Net Income / Sales Return on Total Asset (ROA) = EBIT / Total Assets Return on Total Equity (ROE) = Net Income / Total Equity Technical Analysis
Technical analysis uses statistical trends gathered from market activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes. Technical Analysis
Trend Analysis ◦ Trend analysis is a technique used in technical analysis that attempts to predict future stock price movements based on recently observed trend data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short-, intermediate- and long-term. Technical Analysis
Strategies in Trend Analysis
◦ Moving Averages: These strategies involve entering into long positions when a short-term moving average crosses over above a long-term moving average and entering short positions when a short-term moving average crosses below a long-term moving average. ◦ Momentum Indicators: These strategies involve entering into long positions when a security is trending with strong momentum and exiting long positions when a security loses momentum. Oftentimes, the relative strength index (RSI) is used in these strategies. ◦ Trendlines & Chart Patterns: These strategies involve entering long positions when a security is trending higher and placing a stop-loss below key trendline support levels. If the stock starts to reverse, the position is exited for a profit. Chart Patterns Technical Analysis
Support and Resistance.
Support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. These levels are denoted by multiple touches of price without a breakthrough of the level. Support and Resistance. Importance of Financial Analysis
The goal of financial analysis is to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment. It is used to evaluate economic trends, set financial policies, build long-term plans for business activity, and identify projects or companies for investment. THANK YOU!!!
