Financial analysis is the
process or procedure of evaluating projects, businesses, budgets, and other
finance-related entities or objects to decide their suitability and
performance. Typically, financial analysis is used to analyze or examine
whether an entity or object is stable or profitable enough to permit a monetary
investment. When looking at a specific company or corporation, a financial
analyst conducts investigation or analysis by focusing on the balance sheet,
cash flow statement, and income statement. This is done through the
combination of data and financial numbers.
There are two types of financial analysis:
- Technical analysis.
The strength of financial analysis lies is its easiness and comparability which helps us in the following ways:
- Financial analysis shortens a company's financial statements and allows us to express financial position information and critical profitability in just a few numbers.
- It helps in trend examination or analysis which involves comparing or relating a single company over a period.
- It helps in comparing or relating companies of various size with each other.
- It highlights significant information in modest form quickly
Some of the limitations of Financial Analysis are:
- Financial ratio analysis is useful only when an
evaluation is made between two companies from similar industries. Many
companies have numerous lines of business and their financial statements
provide a compound view of the company. Equating a company with industry
average is not very useful because the average also includes companies that
have been performing poorly.
- Diverse companies follow diverse financial
reporting frameworks, which allow different accounting policies for identical
transactions. In such a situation, it is vital to adjust one company's
financial statements. For example, if one company makes its financial
statements under US GAAP and another follows IFRS, then it is necessary to
convert the IFRS financial statements to US GAAP or vice versa.
- Management's capability to change expectations
potentially allows them to manage their ratios by changing accounting
expectations from time to time which could impair the comparability of
- Ratio analysis explains relationships between
previous information while users are more concerned about present and upcoming
- The calculation procedure of diverse ratios is
not uniform. For example, some analysts calculate return on assets by
operational income and use closing total assets balance in the denominator
while others base on dividing net income by average assets.
provides various functions for statistical analysis and mathematical modeling
of financial data. The toolbox enables you to analyze interest rate levels,
estimate risk, measure investment performance and price equity and interest rate
Financial Toolbox performs or execute portfolio
optimizations, asset allocations, risk analyses, fixed income pricing, and much
- Fixed Income: It determines the cash flows,
price, and yield for various types of fixed-income securities including
- Financial Derivatives: it calculate prices and
sensitivities of derivatives and examine interest rate derivative instruments
Some of the examples of financial toolbox are given below:
- Technical Analysis
- Volatility modeling
- Option modeling
- Fixed Income Analysis