What is a financial analysis?

Financial analysis relates to quantitative analysis of conditions that reflect the financial performance of the company. By calculating the ratios of certain items in the company's financial statements, it is possible to compare the performance of two or more companies in the same industry. By comparing the situation, investors can determine which companies would be good investments.

In the financial ratio analysis, many calculations are used, but they can be freely divided into four groups: lever effect, liquidity and solvency, operation and profitability. The ratios of the lever effect are indicators of how the company funds its operations. The debt to its own capital is the ratio of the key lever effect and indicates how much debt the company compared to its own capital. A company with a high debt ratio to capital may be more risky investment than a company with a lower ratio.

Liquidity ratios measure how quickly the company can repay its short -term debt. If the liquidity ratio is high, it means THVE company is easily capable of afterto cover short -term debts. The current ratio, which is the current assets divided by current obligations, is a commonly used liquidity ratio. The solvency ratio measures the ability of the company to meet its long -term debt. A higher solvency ratio means that the company is more likely to meet its debts and remain a solvent.

The operational efficiency is measured by the operating ratio, also called the operating ratio. This ratio is calculated by distributing operating costs by net sale. A small ratio means that the company is better able to continue to be profitable, albeit a decline in income. The company's profitability can be analyzed on the basis of profitability conditions. These ratios show how well the company can generate profit compared to its expenditure. The profitability ratios include the return on equity, the return on assets and the profit range.

In order to analyze the financial ratio, information used for calculation PThe flickers are obtained from the financial statements of the company. These statements include balance, profit and loss statement and cash flow statements. These statements are updated every quarter and can be found on the company's website and in its annual report.

When performing a financial ratio, it is important to compare companies that are in the same industry. The conditions may vary in industrial industries. For example, a retail company will have a much lower profit margin than a technology company. This would result in very different profitability ratios, which would be ineffective.