Developing skills and abilities to carry out the financial analysis of the company from the financial statements is of great importance for decision making.
Financial analysis consists of compiling the financial statements to compare and study the relationships between the different groups of each one and observe the changes presented by the different operations of the company.
The interpretation of the data obtained, through the financial analysis, allows management to measure progress by comparing the results achieved with the planned operations and the controls applied, it also reports on the debt capacity, its profitability and its financial strength or weakness, this It facilitates the analysis of the economic situation of the company for decision making.
Financial analysis methods
The financial analysis methods are considered as the procedures used to simplify, separate or reduce the descriptive and numerical data that make up the financial statements, in order to measure the relationships in a single period and the changes presented in various accounting years.
For financial analysis it is important to know the meaning of the following terms:
- Profitability: It is the yield generated by the assets put into operation. Rate of return: It is the percentage of profit in a certain period. Liquidity: It is the ability of a company to pay its debts on time.
According to the way of analyzing the content of the financial statements, there are the following evaluation methods:
Vertical analysis method
It is used to analyze financial statements such as the Balance Sheet and Income Statement, comparing the figures vertically. There are two procedures for vertical analysis:
1. Comprehensive percentage procedure: It consists of determining the percentage composition of each account of the Assets, Liabilities and Equity, taking as a base the value of the total Assets and the percentage that represents each element of the Income Statement from the Net Sales.
Integral percentage = partial value / base value X 100
Example The value of the total asset of the company is $ 1,000,000 and the value of the merchandise inventories is $ 350,000. Calculate the integral percentage.
Integral percentage = 350,000 / 1,000,000 X 100
Integral percentage = 35%
The financial analysis allows determining the convenience of investing or granting credits to the business; likewise, determine the efficiency of the administration of a company.
2. Simple ratios procedure: The simple ratios procedure has great practical value, since it allows you to obtain an unlimited number of ratios and indices that serve to determine liquidity, solvency, stability, solidity and profitability in addition to the permanence of your inventories. in storage, the periods of collection of clients and payment to suppliers and other factors that serve to widely analyze the economic and financial situation of a company.
In the following video lesson, from the Private Technical University of Loja, the concept of vertical financial analysis, its methodology and a practical example are presented.
Horizontal analysis method
It is a procedure that consists of comparing homogeneous financial statements in two or more consecutive periods, to determine the increases and decreases or variations of the accounts, from one period to another. This analysis is of great importance for the company, because it informs if the changes in activities and if the results have been positive or negative; It also allows defining which ones deserve more attention because they are significant changes in gait.
Unlike vertical analysis, which is static because it analyzes and compares data from a single period, this procedure is dynamic because it relates the financial changes presented in increases or decreases from one period to another. It also shows the variations in absolute figures, in percentages or in ratios, which allows us to widely observe the changes presented for study, interpretation and decision-making.
Analysis procedure
- Two Financial Statements (Balance Sheet or Income Statement) are taken from two consecutive periods, prepared on the same valuation basis. The corresponding accounts of the analyzed States are presented. (Not including the valuation accounts in the case of the Balance Sheet). The values of each account are recorded in two columns, on the two dates to be compared, recording in the first column the figures for the most recent period and in the second column, the previous period. (The accounts must be recorded at their net value.) Another column is created that indicates the increases or decreases, that indicate the difference between the figures recorded in the two periods, subtracting the values of the previous year from the values of the most recent year. (increases are positive values and decreases are negative values).Increases and decreases in percentage are recorded in an additional column. (This is obtained by dividing the value of the increase or decrease by the value of the base period multiplied by 100.) In another column, the variations in terms of ratios are recorded. (It is obtained when the absolute data is taken from the comparative Financial Statements and the values of the most recent year are divided by the values of the previous year). When observing the data obtained, it follows that when the ratio is less than 1, there was a decrease and when it is higher, there was an increase.(It is obtained when the absolute data is taken from the comparative Financial Statements and the values of the most recent year are divided by the values of the previous year). When observing the data obtained, it follows that when the ratio is less than 1, there was a decrease and when it is higher, there was an increase.(It is obtained when the absolute data is taken from the comparative Financial Statements and the values of the most recent year are divided by the values of the previous year). When observing the data obtained, it follows that when the ratio is less than 1, there was a decrease and when it is higher, there was an increase.
Through the following video lesson, from the UTPL, you can learn more about what it is, what it is for and how horizontal financial analysis is performed.
