Financial Analysis Examples

Financial Statement Analysis is considered one of the best ways to analyze the fundamental aspects. It helps us understand the company’s financial performance derived from its financial statements. It is an important metric to analyze its operating profitability, liquidity, leverage, etc. The following financial analysis example outlines the most common financial analysis used by professionals.

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Top 4 Financial Statement Analysis Examples

Below mentioned are the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more of XYZ Ltd & ABC Ltd.

Balance Sheet of XYZ Ltd. & ABC Ltd.

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

Below mentioned are the examples of financial ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more based on 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:

The Current RatioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it’ short-term loans within a year. Current ratio = current assets/current liabilities read more measures the number of current assets to current liabilities. Generally, the ratio of 1 is considered ideal for depicting that the company has sufficient current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more to repay its current liabilities.

Current Ratio = Current Assets / Current Liabilities

ABC’s Current Ratio is better than XYZ, which shows ABC is in a better position to repay its current obligations.

The Quick ratioQuick RatioThe quick ratio, also known as the acid test ratio, measures the ability of the company to repay the short-term debts with the help of the most liquid assets. It is calculated by adding total cash and equivalents, accounts receivable, and the marketable investments of the company, then dividing it by its total current liabilities.read more helps analyze the company’s instant paying ability of its current obligations.

ABC is better positioned than XYZ to cover its current obligations instantly.

Example #2 – Profitability Ratios

Profitability ratiosProfitability RatiosProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more analyze the earning ability of the company. It also helps in understanding the company’s operating efficiency of the business. A few important profitability ratios are as follows:

Measures the Operating efficiency of the company;

Both companies have a similar operating ratioOperating RatioOperating Ratio refers to a metric determining how efficient a company’s management is at keeping operating costs low while generating revenues or sales, by comparing the total operating expenses of a company to that of its net sales. Operating Ratio Formula = Operating Expenses / Net Sales* 100 read more.

Measures the overall profitability of the company;

XYZ has better profitability compared to ABC.

Return on EquityReturn On EquityReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more measures the return realized from shareholders’ equity of the company.

XYZ provides a better return to its equity holders as compared to ABC.

Return on Capital EmployedReturn On Capital EmployedReturn on Capital Employed (ROCE) is a metric that analyses how effectively a company uses its capital and, as a result, indicates long-term profitability. ROCE=EBIT/Capital Employed.read more measures the return realized from the total capital employed in the business.

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 ratiosTurnover RatiosTurnover Ratios are the efficiency ratios that measure how a business optimally utilizes its assets to generate sales from them. You can determine its formula as per the Turnover type, i.e., Inventory Turnover, Receivables Turnover, Capital Employed Turnover, Working Capital Turnover, Asset Turnover, & Accounts Payable Turnover. read more are as follows:

Inventory Turnover RatioInventory Turnover RatioInventory Turnover Ratio measures how fast the company replaces a current batch of inventories and transforms them into sales. Higher ratio indicates that the company’s product is in high demand and sells quickly, resulting in lower inventory management costs and more earnings.read more measures evaluating the effective level of managing the business’s inventory.

A higher ratio means a company is selling goods quickly and managing its inventory level effectively.

Receivable Turnover Ratios help measure a company’s effectiveness in collecting its receivables or debts.

A higher ratio means the company is collecting its debt more quickly and managing its account receivablesAccount ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more effectively.

The payable Turnover Ratio helps quantify the rate at which a company can pay off its suppliers.

Higher the ratio means a company is paying its bills more quickly and managing its payables more effectively.

Example #4 – Solvency Ratios

Solvency ratiosSolvency RatiosSolvency Ratios are the ratios which are calculated to judge the financial position of the organization from a long-term solvency point of view. These ratios measure the firm’s ability to satisfy its long-term obligations and are closely tracked by investors to understand and appreciate the ability of the business to meet its long-term liabilities and help them in decision making for long-term investment of their funds in the business.read more measure the extent of the number of assets owned by the company to cover its future obligations. Some important solvency ratios are as follows:

The Debt to Equity RatioDebt To Equity RatioThe debt to equity ratio is a representation of the company’s capital structure that determines the proportion of external liabilities to the shareholders’ equity. It helps the investors determine the organization’s leverage position and risk level. read more 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 debt-equity ratio to manage the company’s solvency.

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

Financial leverageFinancial LeverageFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more measures the number of assets available to equity holders of the company. The higher the ratio, the higher the financial riskFinancial RiskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy.read more in terms of debt position to finance the company’s assets.

Higher the ratio of ABC implies that the company is highly leveraged and could face difficulty paying off its debt compared to XYZ.

Conclusion

It is important to understand that financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more 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.

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 –

  • COGS Journal Entry ExamplesTypes of Financial RatiosFinancial AnalysisFinancial Analysis Tools