What is the Usefulness of Appointing a
Financial Analyst for Analysis of Financial Statements and Ratios?
Financial statements and ratios play a crucial role in analyzing progress company is making with respect to set goals. As such in the following sections we will go through important aspects which are an integral part of such analysis.
Role of Financial Analyst – Analysis of Financial Statements and Ratios
Examination of Financial Statements
Income Statements – Balance Sheet – Equity Statement
The financial statements that a financial analyst goes through as part of analysis of financial position of your company include:
- Income statements
- Balance sheet
- Shareholder's equity statements
During analysis of these statements the analyst will look for large deviations for specific items over a span of time. As for instance:
- Have fixed assets fallen or grown in a specific time period?
- Have revenues earned by the firm experienced a big fall or a jump?
If significant deviations are noticed then the next task would consist of finding reasons for the same, as for example:
- Did your company sell off some part of assets it has?
- Were funds invested for buying a new division?
Analysis of Balance Sheet and Income Statement
Comprehend Changes in Company's Assets and Liabilities
A financial analyst has to investigate company's balance sheet to understand changes occurring in assets and liabilities of the company. As for instance, are fixed assets growing rapidly in the last couple of years because of set up of new facilities or due to acquisitions? Is new financing strategy resulting in faster growth of debt?
Check Improvement in Profits – Control Expenditures
Similarly, it would be necessary to analyze income statement to understand specific trends company is experiencing. As for example, your financial analyst will have to check whether profits and revenues are growing consistently or not. Analysis will also be necessary to determine whether income and expenditure trends are moving in the right direction and would help in fulfillment of business strategies you have planned for the company. As for instance, if the company wants to emphasize development of new products and support innovations then the income statement should reflect that by way of higher spending on research.
Are Retained Earnings Growing? – Is Business Strategy Being Followed?
Your financial analyst will also be responsible for examining equity statement for shareholders. Some of the aspects which are to be checked would include:
- Whether your firm bought shares back or issued new ones?
- Is retained earnings growing over a period of time or shrinking?
- Do these trends match your firm's long term business strategy?
Analysis of Financial Ratios
In addition to analysis of financial statements, it would be necessary for financial analyst to utilize different ratios to examine progress your company is making and whether everything is being done in a systematic way to meet your financial goals. Few of the important financial ratios which are analyzed include:
- Liquidity ratio
- Debt ratio
- Efficiency ratio
- Value ratio
- Profitability ratio
To conclude we will say that financial analysis plays an important role in business success and in ensuring each and every business activity takes place as planned.