Answer to Question #226211 in Economics for Peter Masih

Question

1. This pandemic situations has drawn the attention of a lot of individuals to actively watch

and participant in the Indian financial market. As a life-long learner, you also decide to

understand the fundamentals of certain companies listed on the stock exchanges in India. One of your friends advised you to look in to the various techniques of financial analysis, as one of the way of evaluating the financials of business entities. You are done with

getting an understanding about various techniques of financial analysis. Elaborate any five

of the said techniques for financial analysis. (10 Marks)

Answer 1

Data on the finances of an enterprise draws data from the financial statements, in particular from the balance sheet. This is the main accounting report that all business entities, without exception, fill out. It fixes the figures of the assets and liabilities of the enterprise at the beginning and end of the reporting year, as well as at the end of the two previous years; report on financial results. This report, mandatory for all organizations, shows the sources of profit or loss at the end of the year and compares the result with similar indicators of the previous year; a statement of capital flows, is mandatory for large and medium-sized businesses; cash flow statement, it is not formed only by small businesses. To get more data, other financial documents of the company are also used, for example, annexes and explanatory notes to the balance sheet. In the analysis of the financial picture, several methods are often used, one after another or independently of each other. Such a comprehensive study provides a more complete picture of the state of affairs of the organization. There are more than 30 methods of analysis. The most used are: Vertical (structural) analysis - determines the structure of the final financial result, breaking it down into components. Horizontal (time) analysis - examines reporting indicators in dynamics for different time periods.

Trend (dynamic) analysis - reveals a trend of growth or decline in indicators, it is important for forecasting.

Analysis of absolute indicators - evaluates the main results of accounting reports (revenue, net profit, total assets, etc.).

Analysis of relative indicators (coefficients) - expands and deepens the previous method, calculating coefficients using special formulas.

Comparative (spatial) analysis - based on the comparison of indicators, both within one organization, for example, different departments, divisions, and the whole company, for example, with the results of competitors.

Factorial (integral) analysis - determines the influence of various factors (changes in prices for products and raw materials, amendments to laws, etc.) on the resulting indicators.