Scribd
Upload
32 views

Module 3 - Financial Analysis

Uploaded by

Ed Carlo Ramis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
32 views

Module 3 - Financial Analysis

Uploaded by

Ed Carlo Ramis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

MODULE 3

FINANCIAL ANALYSIS

WHAT IS 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.

KEY TAKEAWAYS

 If conducted internally, financial analysis can help managers make future


business decisions or review historical trends for past successes.
 If conducted externally, financial analysis can help investors choose the best
possible investment opportunities.
 There are two main types of financial analysis: fundamental analysis and
technical analysis.
 Fundamental analysis uses ratios and financial statement data to determine
the intrinsic value of a security.
 Technical analysis assumes a security's value is already determined by its
price, and it focuses instead on trends in value over time.

UNDERSTANDING FINANCIAL ANALYSIS

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. This is done through the synthesis of financial numbers and data. A
financial analyst will thoroughly examine a company's financial statements—
the income statement, balance sheet, and cash flow statement. Financial analysis
can be conducted in both corporate finance and investment finance settings.

One of the most common ways to analyze financial data is to calculate ratios from
the data in the financial statements to compare against those of other companies or
against the company's own historical performance.

For example, return on assets (ROA) is a common ratio used to determine how
efficient a company is at using its assets and as a measure of profitability. This
ratio could be calculated for several companies in the same industry and compared
to one another as part of a larger analysis.
HOW FINANCIAL ANALYSIS IS USED

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.

Many companies extend credit to their customers. As a result, the cash


receipt from sales may be delayed for a period of time. For companies with large
receivable balances, it is useful to track days sales outstanding (DSO), which helps
the company identify the length of time it takes to turn a credit sale into cash.
The average collection period is an important aspect in a company's overall cash
conversion cycle.

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.

For example, retailers may see a drastic upswing in sales in the few months
leading up to Christmas. This allows the business to forecast budgets and make
decisions, such as necessary minimum inventory levels, based on past trends.

INVESTMENT FINANCIAL ANALYSIS

In investment finance, an analyst external to the company conducts an


analysis for investment purposes. Analysts can either conduct 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. From this point, they further
analyze the stocks of specific companies to choose potentially successful ones as
investments by looking last at a particular company's fundamentals.

A bottom-up approach, on the other hand, looks at a specific company and


conducts similar ratio analysis to the ones used in corporate financial analysis,
looking at past performance and expected future performance as investment
indicators. Bottom-up investing forces investors to consider microeconomic factors
first and foremost. These factors include a company's overall financial health,
analysis of financial statements, the products and services offered, supply and
demand, and other individual indicators of corporate performance over time.

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. The end goal is to arrive at a number
that an investor can compare with a security's current price in order to see whether
the security is undervalued or overvalued.

TECHNICAL ANALYSIS

Technical analysis uses statistical trends gathered from trading 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.

EXAMPLES OF FINANCIAL ANALYSIS

As an example of fundamental analysis, Discover Financial Services reported


its quarter two 2019 earnings per share (EPS) at $2.32. That was up from a quarter
one 2019 reported EPS of $2.15. A financial analyst using fundamental analysis
would take this as a positive sign of increasing intrinsic value of the security.

Therefore, future EPS projections are also estimated higher. For example,
according to Nasdaq.com, estimated third quarter 2019 EPS is up to $2.29 from an
estimated second quarter 2019 EPS of $2.11 and estimated first quarter 2019 EPS
of $2.00. Notice also, the reported EPS for the first two quarters of 2019 exceeded
the estimated EPS for the same quarters.

On the other hand, technical analysis was conducted on the British Pound
(GBP)/ US Dollar (USD) exchange rate after the results of the Brexit vote in June
2016. Looking at the exchange rate chart, it was apparent that the GBP's value
dropped significantly, to a 31 year low, in comparison to the dollar after the vote to
leave the European Union on June 23, 2016.

SPONSORED

Start with $30 trading bonus

Trade forex and CFDs on stock indices, commodities, stocks, metals and
energies with a licensed and regulated broker. For all clients who open their first
real account, XM offers a $30 trading bonus to test the XM products and services
without any initial deposit needed. Learn more about how you can trade over 1000
instruments on the XM MT4 and MT5 platforms from your PC and Mac, or from a
variety of mobile devices.

REFERENCES

https://www.investopedia.com/terms/f/financial-
analysis.asp#:~:text=Financial%20analysis%20is%20the%20process,to%20warrant%20a%20monetary%2
0investment.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy