The financial statement analysis of a corporation is no insignificant topic when we consider accounting and finance. When we talk about corporations, we do know that every firm has a set of aims. As we have discussed previously regarding the primary objective of value maximization; we are aware that this is possible with the increasing stream of cash flows.
Now, how does a firm estimate or find out the cash flow figures? This is through the statement of cash flows. Likewise, firms record and formulate 5 main financial statements at the end of the financial year; and base their analysis by using the quantified information provided. Here we will discuss the financial statement analysis of a company and its uses through the different types of ratios.
The Financial Statements are:
The Directors Report
A financial document that is prepared by large limited firms; so that shareholders can make informed decisions within the board under the company laws and regulations. This statement consists of minimum standardized information and is set under the financial, accounting, and CSR standards.
Also known as the profit and loss statement or the statement of financial performance. This financial statement is recorded at the period’s end which shows how profitable your firm has been over the year. It includes the revenue, expenses, and other elements such as interest and taxes paid as shown in an example above; thus guiding firms towards costs and profit or losses made.
Statement of financial position
Known as the balance sheet as well; is a financial statement that includes the firm’s assets, liabilities, and equity values in each period. Thus, indicating the possessions, its duties and ownership details in a set period. The format of the balance sheet can be seen above through an example provided.
Statement of Cash Flows
This statement shows the cash inflows and outflows of the company in a set period. The statement is divided into three main sections; operating activities, financing activities, and investing activities as shown above through an example. Each year, a balance is generated which is brought forward and eventually; affects the next year while showing cash flows of each year separately.
Statement of Changes in Equity
A financial statement while includes the opening and closing balances of the shareholder’s equity value. Including elements as important as retained earnings and reserves; this statement is a vital one for every business and like the others; recorded for each set period.
As we have had a look at all the financial statements, we must now see how corporations make analyses using these statements. Firstly, data is gathered from these statements and a different set of ratios are used to make the analysis using different perspectives. These ratios are further compared with its past performances or with Industry averages to interpret and understand a firms performance and position in the market. Let’s have a look at the set of ratios used and the formulas required to make the calculation.
These ratios show the efficiency of a firm’s assets to meet its obligations.
Asset management ratios
These ratios show how efficiently a company’s assets are generating revenue.
Debt management ratios
The ratios indicate the extent of debt financing, eventually showing how risky its operation is for the time.
This shows the ability of a company to generate income and turn towards profitability. The higher the values, the more profitable the firm is, however other factors must be considered.
Market value ratios
Current share prices of a firm, as well as book value per share, are both included in this type; thus, depicting how investor’s attraction relies on these ratios and the overall valuation of the firm in the market.
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All these ratios are used by firms in parallel means to help firms understand their business performance in a better and clearer way. The financial statement analysis includes many factors while the ratio analysis holds great importance for each and every firm
Understand better by reading the Intro to financial management here : Fundamental Concepts of Corporate Finance