Dheeraj Vaidya, CFA, FRM is Co-Founder of Wallstreetmojo.com and possesses 18+ years of expertise in Financial Modeling, Valuations, and Excel. With a background as a former Equity Research Analyst at JPMorgan and CLSA, he brings unparalleled proficiency to these key financial domains.
What Are The Types Of Financial Analysis?
The financial analysis examines and interprets data of various types according to their suitability. The most common types of financial analysis are vertical analysis, horizontal analysis, leverage analysis, growth rates, profitability analysis, liquidity analysis, efficiency analysis, cash flow, rates of return, valuation analysis, scenario and sensitivity analysis, and variance analysis.
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Financial analysis means scrutinizing the financial statement to reach a productive outcome that helps investors and other stakeholders maintain their relationship with the company. There are numerous types that experts and analysts use to analyze financial information.
Financial analysis is the evaluation method for business and finance-oriented transactions to identify performance and capability.
The top 10 types of financial analysis are horizontal analysis, vertical analysis, trend analysis, liquidity analysis, solvency analysis, liquidity analysis, scenario & sensitivity analysis, variance analysis, valuation analysis, and FP&A analysis.
Financial analysis is said to be the essential ingredient in business activity.
Without financial analysis, running a business may be futile. Therefore, executing economic research and carefully handling it is necessary for every organization.
Types Of Financial Analysis Explained
The types of financial analysis ratios are considered the main ingredient in business activity. With this, running a business successfully is possible. Hence, executing and carefully handling economic research is necessary for every organization. Considerably, they should also duly implement all the analysis findings.
There are many types of financial analysis reports that are very useful and frequently used in the business to achieve its objectives. Trend analysis explains the market trend of the entity over a period of time for which past data and chart patterns are used for interpretation. Similarly, profitability, solvency or liquidity analysis tell the financial condition of the company that is used by analysts and investors for making important investment decisions. Even cash flow and valuation analysis says the inflow and outflow of cash in the business and the current valuation of the company.
In this way, various types of financial analysis in management accounting are used. Studies and evaluations consider the financial data of the past and current year, which the management uses for decisions related to investment in projects, technology, innovation, changes in operation procedures, or any alteration in the products and services. Moreover, the other stakeholders, like lenders and investors, use them to decide their expected return on investment or the company’s creditworthiness.
Different Types Of Financial Analysis
Given below are some of the common types of financial analysis ratios using financial data that companies frequently use during their day-to-day operations.
Pros – It helps to analyze the company’s growth from year on year or quarter on quarter with the increase in operations of the company.
Cons – The company operates in the industrial cycle. Therefore, if the industry is downgrading despite the company’s better performance owing to specified factors that impact the industry, trend analysis will indicate the negative growth in the company
Profitability financial analysis helps us understand how the company generates revenue.
The decision related to investment is one of the critical decisions of all business people that ensure the maximum profit from the investment made in the project. To verify the decision’s viability, they need to conduct a profitability analysis to check the rate of return in a given period. These will help the investor in obtaining assurance of the safekeeping of funds.
The following tools are used to analyze the same: –
Let us take a simple example to understand the concept.
We assume ABC Ltd plans pharmaceutical sector, plans to invest money into expansion. It wants to open more retail stores in a few prominent parts of the city and in rural areas. But to achieve this aim, the company has to do a solvency analysis to check the debt-bearing capacity, make a robust cash flow analysis to track whether its collection methods are research, conduct horizontal and vertical analysis to study its overall performance, etc.
Thus, companies do various types of financial analysis reports with their financial data during different decision-making processes.
Frequently Asked Questions (FAQs)
What are the basic types of financial analysis?
The basic types of financial analysis are horizontal, vertical, leverage, profitability, growth, liquidity, cash flow, and efficiency. The two main types of financial analysis are fundamental analysis and technical analysis.
What are the five goals of the financial analysis?
A financial analysis’s main objective is to determine whether a given organisation is secure, solvent, liquid, or profitable enough to justify a financial investment. It is employed to assess financial trends, establish monetary policy, create long-term corporate activity plans, and choose investments in projects or businesses.
What are the three tools of financial analysis?
The three tools of financial analysis are ratios analysis, vertical analysis, and horizontal analysis.
What are the types of financial analysis models?
The primary type of financial analysis models are accounting models and quantitative models.
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