Examples of Financial Analysis

Financial Analysis Examples

Example of Financial analysis is analyzing company’s performance and trend by calculating financial ratios like profitability ratios which includes net profit ratio which is calculated by net profit divided by sales and it indicates the profitability of company by which we can assess the company’s profitability and trend of profit and there are more ratios like liquidity ratios, turnover ratios, and solvency ratios.

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.

Exaples of Financial Analysis

Top 4 Financial Statement Analysis Examples

Below mentioned are the financial statements of XYZ Ltd & ABC Ltd.

Balance Sheet of XYZ Ltd. & ABC Ltd.

Financial analysis (Ratios)

P&L Statement of XYZ Ltd. & ABC Ltd.

Financial analysis (Ratios) 1

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. The most common types are:

Current Ratio

The Current Ratio measures the extent of the number of current assets to current liabilities. Generally, the ratio of 1 is considered to be ideal for depicting that the company has sufficient current assets in order to repay its current liabilities.

Current Ratio Formula = Current Assets/Current Liabilities

Financial analysis Example 1

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

The Quick ratio helps in analyzing the company’s instant paying ability of its current obligations.

Quick Ratio Formula = (Current Assets – Inventory)/Current Liabilities.

Financial analysis Example 1-1

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:

Operating Profitability Ratio

Measures the Operating efficiency of the company;

Operating Profit Ratio Formula = Earnings Before Interest & Tax/Sales

Financial analysis Example 2

Both companies have a similar operating ratio.

Net Profit Ratio

Measures the overall profitability of the company;

Net Profit Ratio Formula = Net Profit/Sales.

Financial analysis Example 2-1

XYZ has better profitability compared to ABC.

Return on Equity (ROE)

Return on Equity measures the return realized from shareholders’ equity of the company.

Return on Equity Formula = Net Profit/Shareholders’ Equity

Financial analysis Example 2-2

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.

ROCE Formula = Earnings before Interest & Tax/Capital Employed

Financial analysis Example 2-3

Both companies have a 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.

Inventory Turnover Ratio Formula = Cost of Goods Sold/Average Inventory.

Example 3

A higher 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.

Receivable Turnover Ratio Formula = Credit Sales/Average Receivables.

Example 3-1

A higher 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.

Payable Turnover Ratio Formula = Total Purchases/Average Payables

Example 3-2

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

The Debt to Equity Ratio measures the amount of equity available with the company to pay off its debt obligations. A higher 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.

Debt Equity Ratio Formula = Total Debt/Total Equity

Example 4

A higher ratio means higher leverage. XYZ is in a better solvency position as compared to ABC.

Financial Leverage

Financial leverage measures the number of assets available to equity holders of the company. The higher the ratio, means higher is the financial risk in terms of debt position to finance the assets of the company.

Financial Leverage Formula = Total Assets/Equity

Example 4-1

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.

Conclusion

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.

Recommended Articles

This article 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 –

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Comments

  1. AvatarAnyait Diana says

    Perfect work
    I appreciate

    • AvatarDheeraj Vaidya says

      Thanks for your kind words!

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