Modern Financial Analysis Techniques
The abundance of accessible data represents one of the greatest technological advancements that have diversified modern financial analysis approaches. Financial analysis empowers industries and companies to concentrate on their performance. Below is an explanation of contemporary financial analysis methods:
Trend Analysis
Trend analysis enables a company to evaluate its performance over time by examining historical trends. By utilizing a series of past financial data alongside projected figures, any organization can make better forecasts by identifying trends and the factors driving those trends.
To conduct financial trend analysis, at least two years of financial data is required. However, many businesses benefit from several years of consistent data for comparative purposes.
Common Size Financial Analysis
Common size financial analysis examines two components of a company’s financial statements: the balance sheet and the income statement. In this technique, all elements of the income statement are represented as a percentage of sales, while balance sheet items are expressed as a percentage of the company’s total assets.
One advantage of this technique is that the use of percentages makes it easier to comprehend both performance and expenses on an annual basis when comparing financial documents. This also facilitates comparisons between your business and others.
Ratio Analysis
Ratio analysis allows for meaningful comparisons and helps in understanding the relationships between different parts of financial statements. Utilizing financial ratios to examine various aspects of a business offers a quick overview of its financial health.
Employing ratio analysis can assist companies in grasping critical business areas, such as debt versus equity, price versus earnings, profit areas like margins and return on assets, along with liabilities including employee costs and inventory turnover.
Benchmarking Analysis
This method is essential for comparing your business to a competitor or the industry at large. It can help answer questions such as, “Does our business possess a competitive advantage? Are there weaknesses or inefficiencies we can address to close the gap between us and our competitors?”
The only challenge with this technique is ensuring that competitors’ data or industry metrics are presented or formulated in the same manner as your company organizes and records its financial transactions.