Financial analysis is a method wherein a financial analyst evaluates the financial data of the company to determine its performance. With the analysis of historical data, you can also carry out recommendations about how to improve in the future.
In this article, we will take a look at the different types of financial analysis that financial reporting and analysis that financial analysts perform to evaluate the past, and present performance of the company to forecast and improve its future performance.
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About financial analysis
Before we move to the different types of financial analysis, let us learn about the financial analysis definition. Financial analysis is a process that is performed by a financial analyst. He is a professional whose job is to analyse historical data and evaluates the financial data of the company to determine its future performance and growth prospects.
The valuable insights gained from the financial statement analysis & valuation also helps them identify the strong zones and carry out recommendations about ways to enhance their future.
Different Types of Financial Analysis
Financial planning and analysis are carried out in the following types. These are mentioned below as:
This analysis is also called a common-sized income statement. It involves looking at different aspects of the income statement. These components are divided by revenue for expressing them as a percentage. In this method, companies of different sizes are evaluated based on their margins in place of the dollars.
This analysis considers the past financial data to determine the rate of growth of any company. It will help the financial analyst determine whether or not a company is progressing or declining, and figure out key trends.
This analysis evaluates the historical growth rates as well as projects future ones. Some of the key examples of growth analysis are:
- Regression analysis
- Year-over-year (YoY)
- Bottom-up analysis, and
- Top-down analysis
This is financial ratio analysis and interpretation wherein the analysts use leverage ratios to determine the performance of any company. Some of the common types of examples include:
Profitability is another type of financial modeling and analysis wherein an analyst evaluates how attractive the economics does a business has. Common types of profitability measures used to perform this analysis include:
- Gross margin
- EBIT margin
- EBITDA margin
- Net profit margin
This analysis focuses on the balance sheet of the company to determine whether it can fulfill short-term obligations. Common types of liquidity analysis include:
- Acid test
- Current ratio
- Cash ratio
- Networking capital
Financial data is an important way to evaluate the performance of any company and make future recommendations in the business. Understanding the common types of financial analysis will help you get a lot of important information about the valuation of the company and its future performance.