FINANCIAL STATEMENT ANALYSIS SERVICE

Category: Tax & Accounting Services

Written by Zahrial Fakhri on 28/11/2023
The author’s views are entirely their own and may not always reflect the views of Putranto Alliance.

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Introduction

Understanding financial analysis is crucial for evaluating a performance of company across various stakeholders. By utilizing diverse financial analysis tools, stakeholders can gain valuable insights into critical finance aspects of a company, making it an indispensable process for assessing and comprehending overall performance. Analysing a company can be challenging, and the choice of analysis tools depends on the specific aspects of performance that stakeholders want to evaluate.

Definition

Financial statement analysis involves delving into a financial record of a company to gain insight into its financial position. The process aims to inform decisions such as investment choices by identifying specific items within financial statements of a company across multiple reporting periods. This evaluation is crucial for stakeholders to understand the financial health and performance of a company.

The Importance of Financial Statement Analysis

Financial statement analysis holds significant importance for various stakeholders by employing financial analysis tools, decision-makers can gain valuable insights into essential finances elements of a company, enabling the stakeholders to make informed decisions. This process is critical for assessing and comprehending overall performance and is essential for:

  1. Investment Decisions
    Investors rely on financial statement analysis to assess potential investments by gaining insights into historical performance of a company and outlook.

  2. Business Growth
    Business owners use financial statement analysis to make data-driven and strategic decisions that lead to growth and success.

  3. Lending Money
    Creditors analyse financial statements to evaluate the level of risk involved in extending loans to a company and to determine appropriate terms and conditions for credit arrangements.

  4. Risk Management
    Financial statement analysis serves as an early warning system, enabling stakeholders to identify and mitigate risks before escalating and impacting financial conditions.

The Best Time to Conduct Financial Statement Analysis

The best time to conduct financial statement analysis depends on the specific needs and objectives of the stakeholders involved. Here are some key considerations:

  1. Regular Monitoring
    Financial statement analysis should be performed regularly to track the performance of the company over time and identify trends or patterns. This allows stakeholders to make timely adjustments and strategic decisions as needed.

  2. Periodic Reporting
    Companies typically release the financial statements on a quarterly or annual basis. Stakeholders often conduct financial statement analysis shortly after these reports are made available to stay updated on the financial health of company.

  3. Strategic Planning
    Financial statement analysis is crucial during strategic planning sessions, such as setting short-term or long-term financial goals. By analysing historical data and projecting future performance, stakeholders can develop informed strategies for growth and success.

  4. Investment Evaluation
    For investors considering investing in a company, financial statement analysis should be conducted before making investment decisions. By thoroughly evaluating financial position and performance of the company, investors can assess the potential risks and returns of the investments. Therefore, stakeholders can take proactive measures to mitigate risks and safeguard of interests and assess financial ratio and/or other key indicators of financial health.

  5. Loan Application
    When applying for loans or credit, companies may need to provide financial statements to creditors for assessment. Conducting financial statement analysis beforehand can help companies identify areas of strength and weakness, allowing to present a compelling case to lenders.

  6. Performance Monitoring
    Financial statement analysis provides stakeholders with tools to monitor and track performance metrics over time. By setting key performance indicators (KPIs) and regularly analysing financial data, stakeholders can assess progress towards goals, identify deviations also take corrective actions as needed.

  7. Performance Evaluation
    Financial statement analysis enables stakeholders to evaluate financial performance of a company over time. By comparing current and historical data, stakeholders can identify areas of improvement, and measure progress towards financial goals.

Benefits of Financial Statement Analysis

Financial statement analysis offers numerous benefits for stakeholders in various capacities. Here are some key advantages:

  1. Informed Decision-Making
    By analysing financial statements, stakeholders can make informed decisions regarding investment and other financial matters. The insights gained from financial analysis help stakeholders identify risk opportunities and determine the best course of action.

  2. Competitive Analysis
    Financial statement analysis allows stakeholders to compare a financial performance of company with that of its competitors. By benchmarking against industry peers, stakeholders can identify competitive strengths and weaknesses, also identify areas for improvement.

  3. Stakeholder Communication
    Financial statements serve as a means of communication between a company and its stakeholders. Through transparent and accurate financial reporting, companies can build trust, enhance credibility, and maintain positive relationships with stakeholders.

  4. Strategic Planning
    Financial statement analysis plays a critical role in strategic planning processes. By providing insights into financial trends, and business performance, financial analysis helps stakeholders develop and refine strategic plans, allocate resources effectively, and pursue growth opportunities.

The Process of Financial Statement Analysis Service

Financial statement analysis involves a systematic process that requires attention to detail and a thorough understanding of financial concepts. Here is a step-by-step guide on how to conduct financial statement analysis effectively:

  1. Gather Financial Statements
    Start by collecting the relevant financial statements, including the income statement, balance sheet, and cash flow statement. Ensure that the financial statements are accurate and prepared in accordance with accounting standards.

  2. Review Financial Statements
    Carefully review each financial statement to understand the financial position and performance of a company. Look for trends, and patterns outliers that may indicate strengths or weaknesses in finances of the company.

  3. Calculate Financial Ratios
    Calculate key financial ratios using data from the financial statements. These financial ratios provide insights into various aspects of the financial health and performance of a company.

  4. Compare Ratios
    Compare the calculated ratios of industry benchmarks and competitors to assess the relative performance of the company. Identify areas where the company excels and areas where improvement may be needed.

  5. Analyse Trends
    Analyse trends in financial data over multiple reporting periods to identify patterns and changes. Look for consistent growth or decline in key metrics, as well as any anomalies that may require further investigation.

  6. Interpret Findings
    Interpret the findings of the financial analysis in the context of the industry of company, market conditions, and strategic objectives. Consider the implications of the analysis for decision-making, risk management, and strategic planning.

  7. Prepare Reports
    Prepare clear and concise reports summarizing the findings of the financial analysis. Use charts and graphs to present key metrics and trends visually. Ensure that the reports are tailored to the needs of the intended audience and provide actionable insights.

  8. Communicate Results
    Communicate the results of the financial analysis to relevant stakeholders and clearly explain the implications of the analysis and provide recommendations for future actions.

How We Can Help

Our financial experts offer tailored solutions to navigate the complexities of financial statement analysis, ensuring informed decision-making based on accurate financial data.Β  Here is how Putranto Alliance can assist you with our deep understanding of diverse industries:

  1. Analysing Financial Ratio
    Putranto Alliance will conduct comprehensive analyses of income statements, balance sheets, and cash flow statements, providing actionable insights to optimize working capital and enhance profitability.

  2. Trend Analysis
    Putranto Alliance is capable to analyze changes and trends of the financial statements over time to identify patterns or significant changes that may affect the performance of the company financially. Our team will ensure the accuracy of the information so that the client can make informed decisions about the future.

  3. Vertical and Horizontal Analysis
    Putranto Alliance will compare components of financial statements vertically (between accounts within one period) and horizontally (between different periods) to identify changes in the structure and financial performance so the company will understand what account contributes the most changes in the report.

  4. Financial Forecasting and Projection
    Putranto Alliance will analyze historical data and trends to make forecasts about future financial performance of the company and assist in strategic planning as well as decision-making processes.

  5. Company Valuation
    Putranto Alliance will analyze financial statements to assess the value of the company, both for internal purposes such as stock pricing or management decisions and external purposes such as acquisitions or mergers.

Putranto Alliance will provide ongoing support to implement recommendations and track progress over time, serving as the company trusted partner in financial analysis and strategic planning.

FAQs

Financial analysis helps businesses understand their financial strengths and weaknesses, identify areas for improvement and attract investors. It provides valuable insights into the financial health and performance of the company.

There are two methods commonly used in financial analysis statements which are horizontal or vertical analysis and ratio analysis.

Horizontal analysis compares two or more accounting periods to reveal the changes presented by absolute number and percentage comparison, while vertical analysis tells the proportion of an account to its benchmark which is a total asset for the balance sheet and net sales for income statements in a single period.

Common financial ratios include liquidity ratios (current ratio, quick ratio, cash ratio), profitability ratios (return on asset, return on equity, net profit margin, and gross profit margin), and solvency ratios (debt-to-equity ratio, and interest coverage ratio).

Financial analysis statements should be conducted regularly, typically quarterly or annually, to track performance over time and identify trends. However, the frequency may vary depending on the needs of the business and external factors affecting the industry. By routinely examining financial performance indicators, typically on a quarterly or annual basis, businesses can gain valuable insights into the financial health and trajectory. This consistent monitoring allows for the identification of emerging trends and the evaluation of overall performance against established benchmarks.

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