What are the ratios of financial analysis
Financial analysis ratios refer to a set of accounting tools that financial analysts use to interpret and analyze financial statements, such as:
Liquidity ratios: measure the company’s ability to meet its short-term obligations, divided into the current ratio and the express ratio. The express ratio is similar to the current one, but differs in excluding inventory from current assets, therefore it is used to assess the company’s ability to fulfill its short-term obligations without relying on inventory.
Profitability ratios: shows the company’s ability to make profits, and the most common profitability ratios are gross profit margin, net profit margin, return on assets, return on equity, and return on capital employed.
Debt ratios: shows the company’s ability to meet its long-term obligations, and the most common debt ratios are the debt-to-equity ratio and the interest coverage ratio.
Efficiency ratios: determine how effectively the company uses its assets and liabilities, the most common efficiency ratios are the inventory turnover ratio, and the accounts receivable turnover ratio.
Market forecast ratios: measure how investors view a company’s shares, the most common market ratios are book value per share, profitability per share, and cash return per share.
Solvency ratios: the company’s debt levels are compared with its assets and profits, in order to assess the company’s long-term viability, the most common solvency ratios are debt-to-equity ratios, debt-to-asset ratios, and interest coverage ratios.
Objectives of financial analysis
Because the financial statements provide a detailed picture of the company’s financial performance and condition during a specific period, the primary objective of the financial Analysis of these data is to assess this performance and the condition of the company. The profitability of the company can be assessed by analyzing the income statement, which determines the sources of income and expenses, as well as calculating various ratios.
Along with this, financial analysis helps to assess the liquidity of the company, the extent to which it is able to fulfill its short-term financial obligations by analyzing its balance sheet. It also provides an insight into the company’s financial solvency, its ability to pay its long-term obligations, in addition to assessing the company’s ability to effectively manage its resources, especially managing its inventory, collecting its dues, and paying what it owes.
What are financial analysis tools
There are many programs and tools available that facilitate the process of analyzing financial statements, including:
Microsoft Excel: Excel is widely used for data analysis, as it allows users to organize and analyze large amounts of data. The program has a variety of built-in tools and functions, for conducting statistical analysis, financial calculations and other tasks related to economic analysis.
App4Finance: designed for use in financial institutions and investment banks, this program provides a set of tools for financial modeling, risk management and portfolio analysis, and is commonly used by financial analysts and portfolio managers.
Zoho Analytics: this software is used to analyze data from a variety of sources, including spreadsheets, databases and cloud-based applications. It provides a set of tools for creating and modeling data schemas, as well as predictive analytics, and is commonly used by companies and organizations to gain insights into their operations and financial performance.
Financial analysis standards
A financial analyst follows a set of principles when analyzing financial statements, to ensure that his analysis is accurate, objective and reliable. At the forefront of these standards is the set of internationally accepted accounting principles, such as:
Relative importance: the financial analyst must take into account the relative importance when analyzing financial statements, as it refers to the size of the error or omission in the financial statements that may affect the judgment of the person who relies on those data. The relative importance helps companies filter the information disclosed in the financial statements, make it more relevant and less cluttered.
Consistency: financial statements must be consistent from period to period, this means that the accounting policies and methods used in the preparation of financial statements must remain consistent over time, except when changes are necessary for force majeure reasons.
Objectivity: a financial analyst must be objective in his analysis of financial statements, he relies on verifiable and reliable data, and his analysis must be free from personal bias or conflicts of interest.
Full disclosure: the need to provide financial statements means full disclosure of all material information, including all accounting policies, judgments, significant estimates and operations conducted by management.
Compliance with industry regulations: a financial analyst also complies with industry-specific regulations, such as securities and Exchange Commission regulations for publicly traded companies.
