What is Financial Analysis?Financial analysis involves using financial data to assess a company’s performance and make recommendations about how it can improve going forward. Financial Analysts primarily carry out their work in Excel, using a spreadsheet to analyse historical data and make projections of how they think the company will perform in the future. This guide will cover the most common types of financial analyses professionals perform.Types of Financial Analysis – The most common types of financial analysis are:
- Vertical
- Horizontal
- Leverage
- Growth
- Profitability
- Liquidity
- Efficiency
- Cash Flow
- Rates of Return
- Valuation
- Scenario & Sensitivity
- Variance
- Vertical Analysis
- Horizontal Analysis
- Leverage Analysis
- Debt/equity
- Debt/EBITDA
- EBIT/interest (interest coverage)
- Dupont analysis – a combination of ratios, often referred to as the pyramid of ratios, including leverage and liquidity analysis.
- Growth Rates
- Year-over-year (YoY)
- Regression analysis
- Bottom-up analysis (starting with individual drivers of revenue in the business)
- Top-down analysis (starting with market size and market share)
- Other forecasting methods
- Profitability Analysis
- Gross margin
- EBITDA margin
- EBIT margin
- Net profit margin
- Liquidity Analysis
- Current ratio
- Acid test
- Cash ratio
- Net working capital
- Efficiency Analysis
- Asset turnover ratio
- Fixed asset turnover ratio
- Cash conversion ratio
- Inventory turnover ratio
- Cash Flow
- Operating Cash Flow (OCF)
- Free Cash Flow (FCF)
- Free Cash Flow to the Firm (FCFF)
- Free Cash Flow to Equity (FCFE)
- Rates of Return
- Return on Equity (ROE)
- Return on Assets (ROA)
- Return on invested capital (ROIC)
- Dividend Yield
- Capital Gain
- Accounting rate of return (ARR)
- Internal Rate of Return (IRR)
- Valuation Analysis
- Cost Approach
- The cost to build/replace
- Relative Value (market approach)
- Comparable company analysis
- Precedent transactions
- Intrinsic Value
- Discounted cash flow analysis
- Scenario & Sensitivity Analysis
- Variance Analysis
- Being highly organised with data
- Keeping all formulas and calculations as simple as possible
- Making notes and comments in cells
- Auditing and stress testing spreadsheets
- Having several individuals review the work
- Building in redundancy checks
- Using data tables and charts/graphs to present data
- Making sound, data-based assumptions
- Extreme attention to detail while keeping the big picture in mind
Evita Veigas
4 min read