Financial Analysis Examples
In finance, one of the most common way to understand the financial capability of any company/firm/concern is to perform financial statement analysis. Financial Statement Analysis is considered as one of the best ways to analyze the fundamental aspects of a business. It helps us in understanding the financial performance of the company derived from its financial statements. This is an important metric to analyze the company’s operating profitability, liquidity, leverage, etc. The following financial analysis example provides an outline of the most common financial analysis used by professionals.
Top 4 Financial Statement Analysis Examples
Below mentioned are the financial statements of XYZ Ltd & ABC Ltd.
Balance Sheet of XYZ Ltd. & ABC Ltd.
P&L Statement of XYZ Ltd. & ABC Ltd.
Below mentioned are the examples of financial ratio analysis on the basis of financial statements provided above:
Example #1 – Liquidity Ratios
Liquidity ratios measure the ability of a company to pay off its current obligations. Most common types are:
Current Ratio measures the extent of the amount of current assets to current liabilities. Generally, the ratio of 1 is considered to be ideal to depict that the company has sufficient current assets in order to repay its current liabilities.
ABC’s Current Ratio is better as compared to XYZ which shows ABC is in a better position to repay its current obligations.
Quick ratio helps in analyzing the company’s instant paying ability of its current obligations.
ABC is in a better position as compared to XYZ to instantly cover its current obligations.
Example #2 – Profitability Ratios
Profitability ratios analyze the earning ability of the company. It also helps in understanding the operating efficiency of the business of the company. Few important profitability ratios are as follows:
4.9 (1,067 ratings)
Operating Profitability Ratio
Measures the Operating efficiency of the company.
Both companies have a similar operating ratio.
Net Profit Ratio
Measures the overall profitability of the company.
XYZ has better profitability compared to ABC.
Return on Equity (ROE)
Return on Equity measures the return realized from shareholders’ equity of the company.
XYZ provides a better return to its equity holders as compared to ABC.
Return on Capital Employed (ROCE)
Return on Capital Employed measures the return realized from the total capital employed in the business.
Both the companies have similar return ratio to be provided to all the owners of capital.
Example #3 – Turnover Ratios
Turnover ratios analyze how efficiently the company has utilized its assets.
Some important turnover ratios are as follows:
Inventory Turnover Ratio
Inventory Turnover Ratio measures in evaluating the effective level of managing the inventory of the business.
Higher the ratio means a company is selling goods very quickly and is managing its inventory level effectively.
Receivable Turnover Ratios
Receivable Turnover Ratios helps in measuring a company’s effectiveness in collecting its receivables or debts.
Higher the ratio means the company is collecting its debt more quickly and managing its account receivables effectively.
Payable Turnover Ratios
Payable Turnover Ratio helps in quantifying the rate at which a company is able to pay off its suppliers.
Higher the ratio means a company is paying its bills more quickly and able to manage its payables more effectively.
Example #4 – Solvency Ratios
Solvency ratios measure the extent of the number of assets owned by the company to cover its future obligations. Some important solvency ratios are as follows:
Debt Equity Ratio
Debt to Equity Ratio measures the amount of equity available with the company to pay off its debt obligations. Higher the ratio represents the company’s unwillingness to pay off its obligations. Therefore it is better to maintain the right amount of debt-equity ratio in order to manage the company’s solvency.
Higher the ratio means higher leverage. XYZ is in better solvency position as compared to ABC.
Financial leverage measures the number of assets available to equity holders of the company. Higher the ratio means higher is the financial risk in terms of debt position to finance the assets of the company.
Higher the ratio of ABC implies that the company is highly leveraged and could face difficulty in paying off its debt as compared to XYZ.
It is important to understand that financial ratios are one of the most important metrics used by finance professionals in analyzing the financial performance of companies. Also, it helps in understanding the relative performance of two or more companies in the same industry.
This has been a guide to Examples of Financial Analysis. Here we discuss the top 4 Financial Analysis Examples including profitability, liquidity, turnover, and solvency ratios. You can learn more about financing from the following articles –