Financial Analysis


What is Financial Analysis?

Financial analysis is the study and interpretation of the accounting information of a company or organization in order to diagnose its current situation and project its future development.

The financial analysis consists of a series of techniques and procedures (such as studies of financial ratios, indicators and other techniques) that allow to analyze the accounting information of the company in order to obtain an objective vision about its current situation and how it's expected that this Evolve in the future.

Objective of the financial analysis

The objective of the financial analysis is to obtain a diagnosis that allows the economic agents interested or related to the organization to make the best decisions.

The use of financial analysis will depend on the position or perspective in which the economic agent in question is. Considering the above we can divide the agents into two groups:

- Internal: company administrators use financial analysis in order to improve company management, correct imbalances, prevent risks or seize opportunities. A good financial analysis is key to planning, correcting and managing.
- External: external agents use financial analysis to know the current situation of the company and its possible future trend. For example, for an investor it's important to know the status of a company to see if it's worth investing in it. Other relevant external agents are: customers, suppliers, potential investors, regulators, tax authorities, etc.

How the financial analysis is performed

The financial analysis is carried out through the observation of the accounting data of the company (mainly Financial Statements of a certain period), ratios, indices and other indicators together with additional information mainly related to economic and competitive context in which the organization.

There are three basic concepts that should be reported:

- Profitability: the accounts related to income, costs and results are observed. It's about determining not only its value but also its composition, quality, evolution and projection.
- Liquidity: that is, the ability to meet your resource needs and meet your short-term debts. Here variables such as indebtedness, current assets, maturation period, rotation, etc.are observed.
- Solvency: refers to your ability to meet long-term debts and also be able to invest to grow in the future. In this case we observe variables such as: long-term indebtedness, equity, sources of financing, etc.

Methods of financial analysis

There are two methods according to how the analysis is structured:

- Vertical: Financial statements for a single period are analyzed
- Horizontal: Financial Statements of more than one period and / or more than one company are studied.

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