Answer to Question #230525 in Accounting for shubham

Question

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.

Answer 1

Financial analysis techniques help various users of the financial statements to gain an understanding of the performance of the company within a specified period compared to certain period of time.

The techniques used in financial analysis vary and include;

a) Horizontal analysis - focuses on the line item and compares the growth in one period to another. For example, growth in sales in 2018 is 4% then you compare the same in 2019 and explain why there is variance between the two.

b) Vertical analysis - It focuses on the correlation between various items on the financial statement. There is a base item like the sales or total assets and the other items are taken as a percentage of the base item to determine its contribution to the total sales or assets of the company thus helping on knowing how to improve it.

c) Trend analysis - It focuses on the pattern of the financial statement item over time to determine whether it has a negative or positive growth within a specified period of time using one year as the base year.

d) Ratio analysis - It helps in understanding the financial performance of all items in comparison to other periods. It is the easiest way of understanding the overall performance of the organization. It also compares the same with other firms in the industry to gauge its performance and dominance through revenue, market share, market capitalization.

e) Cash flow analysis - it is used to measure the overall liquidity of a company. This can be through income-generating items, financing activities, or investing activities.