Overview of Financial Analysis Techniques

Nov 26, 2024

Financial Analysis Lecture Notes

Introduction to Financial Analysis

  • Financial analysis assesses a company's performance and makes future recommendations.
  • Analysts use historical data in Excel to generate projections.
  • 12 common types of financial analysis are crucial for understanding company performance.

Types of Financial Analysis

1. Vertical Analysis

  • Involves dividing each line item on the income statement by revenue.
  • Enables comparison with other companies in the same industry (common sized income statement).

2. Horizontal Analysis

  • Moves across the income statement to compare year-over-year performance.
  • Uses 3-5 years of historical data to express growth rates.
  • Also known as trend analysis.

3. Leverage Ratios

  • Analyze the amount of debt or equity relative to assets or cash flow.
  • Important for understanding a company's financial structure.

4. Growth Rates

  • Forecasts company growth based on historical results.
  • Includes year-over-year growth rates, regression analysis, bottom-up, and top-down forecasting.

5. Profitability Analysis

  • Examines income relative to revenue.
  • Key metrics: gross profit, EBITDA, EBIT, and net profit margins.

6. Liquidity Analysis

  • Assesses short-term ability to meet obligations.
  • Important metrics: current ratio, asset test, cash ratio, and net working capital.

7. Efficiency Analysis

  • Evaluates how well a company uses its assets to generate revenue.
  • Focuses on balance sheet and sales.

8. Cash Flow Analysis

  • Essential as "cash is king" in finance.
  • Metrics to analyze cash flow statement are crucial.

9. Rates of Return

  • Important for investors to get ROI.
  • Key metric: internal rate of return.

10. Valuation Analysis

  • Values a company based on cash flow or other metrics.
  • Main methods: cost approach, market approach, and discounted cash flow approach.

11. Scenario and Sensitivity Analysis

  • Layers on top of valuation to assess sensitivity to changes in assumptions.
  • Helps understand business performance in different future states.

12. Variance Analysis

  • Compares performance relative to budget or forecast.
  • Uses root cause analysis to identify causes of over/underperformance.
  • Utilizes waterfall charts for summarization.

Conclusion

  • All 12 methods are essential for a full picture of a business's performance.
  • Provides insight into expected future performance.

Thank you for attending the tutorial on financial analysis.