Writing a company’s detailed financial analysis can be necessary to determine whether to invest in the company. There is no specific method for doing so and presentation styles will vary, but key components should be included in any financial analysis. Only after carefully reviewing all the components can a conclusion be drawn regarding the company’s financial health.
The first step to preparing a financial analysis of any company is to obtain at least three years’ worth of financial statements, although five years’ worth is ideal. Financial statements can be easily obtained from the company’s annual report or SEC filings through the EDGAR database (see Resources). Depending on the size of the company, a variety of financial statements may be available. All companies should have a balance sheet and income statement; however, larger companies also may have a cash flow statement as well as a shareholder’s equity statement for review. Obtain all statements, if possible. Review all statements and look for any huge changes, movements or irregularities. Read the attached notes, if available, for explanations.
Balance Sheet and Income Statement
As the name implies, the balance sheet shows the balance between the company’s assets, liabilities and shareholder equity. When preparing a financial analysis, pay particular attention to any significant shifts in the balance. For example, did the company’s debt percentage increase noticeably or assets decrease recently? The income statement is basically the company’s profit and loss statement. A company that is performing well and is financially sound should show a consistent upward trend on the income statement.
Shareholder’s Equity and Cash Flow Statements
The shareholder’s equity statement tells you how many shares of the company are outstanding and whether the company has issued new shares or bought back shares recently. Activity reflected on the shareholder’s equity statement can offer insight into the company’s future plans. The cash flow statement is similar to the income statement; however, the cash flow statement is a more precise measure of how much cash the company truly has on hand, where it has spent money and how it has earned money.
Ratios, Stocks and Competition
Numerous financial ratios can be computed with the data obtained from the various reports. These include the liquidity ratio or gearing ratio. Each one can provide additional insight into the financial health of the company. Stock fluctuations, as well as dividend payouts, also can indicate steady or erratic growth as well as the presence or absence of sound long-term planning. Finally, consider the company’s competition. Understanding how much competition a company has and how well the competitors are performing can play an important role in preparing a company financial analysis.
Renee Booker has been writing professionally since 2009 and was a practicing attorney for almost 10 years. She has had work published on Gadling, AOL’s travel site. Booker holds a Bachelor of Arts in political science from Ohio State University and a Juris Doctorate from Indiana University School of Law.