Definition of financial analysis

A financial analysis refers to the study that is carried out to evaluate the accounting data of an institution. The concept of financial analysis for a company is transcendental because it provides vital and deep information related to the situation of a company.

What are the objectives of a financial analysis?

The first objective of financial analysis is to evaluate, analyze and develop a diagnosis of the situation of a company, entity or institution at a given time, to, based on this, extract operating conditions that serve the future of the company, thus allowing its economic development.

In addition to this, another of the maxims of financial analysis has to do with the extraction of data at the external level of the company, that is, information about its suppliers, investors or simply issues related to the business policy of the State and current legislation.

Therefore, among the tasks of financial analysis, issues related to profitability, indebtedness, economic-financial situation and investments are fundamental. This is the reason why each of the corresponding data must be accessed by administrators.

5 tips for preparing a financial analysis

Throughout a financial analysis you need to evaluate trends, comparisons or financial statements among others. For the results of the financial analysis to be as faithful to reality, a specific structure is needed. Here are some tips for preparing a financial analysis, made up of basic information that will need to be collected:

  • Information about the accounts, such as data that has to do with the liquidity of the institution.
  • Information about liabilities, this is something basic, because liabilities help to know if a company is prepared to face its debts, in the short and long term.
  • Quantitative information, related to profitability of the company. You must also have the flow of funds available.
  • Information related to the financial statements of at least the last 4 years.
  • Other qualitative information to prepare a financial analysis is related to the environment of the company, internal and external. We speak from the worker's work environment to the competition, going through legal and economic issues at a national and international level.

How is data from a financial analysis interpreted?

When interpreting the financial analysis data and getting the most out of it, we must take into account two fundamental methods. One of them is the horizontal method. The other is the vertical method.

The horizontal method serves as a support to buy exactly the last two economic periods. Therefore, it will provide data on the profitability of the company. For its part, what the vertical method does is to throw the results of each period, so that it analyzes the financial trend of the company.

Leave a Comment