Financial analysis

Encyclopedia : F : FI : FIN : Financial analysis

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Financial analysis is the analysis of the accounts and the economic prospects of a firm.

Goals

Such an analysis has the objective to assess the firm's:

• performance, for the management to improve it,

• solvency, so as for a bank or a supplier to grant a credit,

• potential value to decide an investment or divestment. Then it is called fundamental analysis and is linked to business valuation and stock valuation

Methods

Financial analysts, among other tasks, use to compare financial ratios (of solvency, profitability, growth...)

• between several periods (the last 5 years for example)
• and between similar firms.

Those ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example :

''Net profit / equity = return on equity

''Gross profit / balance sheet total = return on assets

''Stock price / earnings per share = P/E-ratio

See also

• Business valuation
• Fair value
• Fundamental analysis
• Return on capital
• Stock valuation

Ratios

• PE ratio
• PEG ratio

 

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