Financial Analysis And Statement Analysis Essay

Financial disceptation abbreviation (or pecuniary analysis) is the process of reviewing and analyzing a corporations financial statements to make better economic decisions. These statements accept the income statement, balance sheet, statement of cash flows, and a statement of retained earnings.Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situations.The statements for two or more periods argon used in horizontal analysis. The earliest period is usually used as the base period and the items on the statements for all later periods be comp ared with items on the statements of the base period. The changes are mostly shown both in dollars and percentage.Vertical analysis is the proportional analysis of a financial statement, where each byplay item on a financial statement is listed as a perce ntage of another item. Typically, this bureau that every line item on an income statement is stated as a percentage of hoggish sales, while every line item on a balance sheet is stated as a percentage of total assets.The most common use of vertical analysis is within a financial statement for a single time period, so that you can see the relative proportions of estimate balances. Vertical analysis is also useful for timeline analysis, where you can see relative changes in accounts over time, such(prenominal) as on a comparative basis over a five-year period. For example, if the cost of goods sold has a history of being 40% of sales in each of the past four years, then a new percentage of 48% would be a cause for alarm.Solvency Ratio is a key system of measurement used to measure an enterprises power to meet its debt and other obligations. The solvency ratio indicates whether a caller-outs cash flow is sufficient to meet its short-run and long-term liabilities. The lower a par tnerships solvency ratio, the greater the probability that it will default on its debt obligations.Solvency and liquidnessity are both call that refer to an enterprises state of financial health, but with some notable differences. Solvency refers to an enterprises capacity to meet its long-term financial commitments. Liquidity refers to an enterprises ability to pay short-term obligations the term also refers to its capability to sell assets quickly to raise cash. A solvent company is genius that owns more than it owes in other words, it has a positive net worth and a manageable debt load. On the other hand, a company with adequate liquidity may have enough cash usable to pay its bills, but it may be heading for financial disaster down the road.Solvency and liquidity are equally important, and healthy companies are both solvent and possess adequate liquidity. A number of financial ratios are used to measure a companys liquidity and solvency, the most common of which are discussed below.Liquidity Ratiosstream ratio = Current assets / Current liabilitiesThe current ratio measures a companys ability to pay off its current liabilities (payable within one year) with its current assets such as cash, accounts due and inventories. The higher the ratio, the better the companys liquidity position.Quick ratio = (Current assets Inventories) / Current liabilities= (Cash and equivalents + Marketable securities + Accounts receivable) / Current liabilitiesThe quick ratio measures a companys ability to meet its short-term obligations with its most liquid assets, and therefore excludes inventories from its current assets. It is also known as the acid-test ratio.Days sales outstanding = (Accounts receivable / enumerate credit sales) xNumber of days in salesDSO refers to the average number of days it takes a company to collect payment after it makes a sale. A higher DSO means that a company is taking unduly long to collect payment and is tying up capital in receivables. DSO s are generally calculated quarterly or annually.Solvency RatiosDebt to equity = chalk up debt / Total equityThis ratio indicates the grad of financial leverage being used by the business and includes both short-term and long-term debt. A rising debt-to-equity ratio implies higher interest expenses, and beyond a certain point it may shanghai a companys credit rating, making it more expensive to raise more debt.Debt to assets = Total debt / Total assetsAnother leverage measure, this ratio measures the percentage of a companys assets that have been financed with debt (short-term and long-term). A higher ratio indicates a greater degree of leverage, and consequently, financial risk.Interest coverage ratio = operational income (or EBIT) / Interest expenseThis ratio measures the companys ability to meet the interest expense on its debt with its operating income, which is equivalent to its earnings before interest and taxes (EBIT). The higher the ratio, the better the companys ability to cover its interest expense.