Question

Why do organizations need to perform financial analysis? Explain each of the steps involved.

Answer 1

Organizations needs to perform financial analysis because of the below points:

1. To assess the financial stability and performance.
2. To prepare the forecasts with the growth assumptions.
3. To correctly evaluate the debt and equity and raise if any capital is required.
4. To recognize and trail the economical indicators.
5. To redefine the company strategies

Steps involved in Financial Analysis:

Horizontal Analysis: This is a way to perform the ratio analysis by comparing the historical data from the past database. Percentages are used in evaluating to see the growth rate and used for assumptions to forecast.

Vertical Analysis: Each line item out of the Balance Sheet is divided by Revenue item or gross sales to compare the percentages with the other firms. This shows the strength of a company compared to the other firm's in the same industry. This is also known as common size financial statement.

Trend Analysis: Performing a graphical chart with other Industrial firm's index, main index and the company's stock price and see how co-efficient the stock price is over past decade. This determines the trend and market value over the years.