1. What is financial analysis?
Financial Analysis is also known as Analysis of finance or financial statement analysis.It is a process where you check if the business or a certain project is profitable. It also checks if the business is viable and stable.
The ratios from the financial statements are used to prepare reports. These reports help the top management to take important business decisions. Financial analysis helps to take investment decisions, to make purchase decisions, a decision to issue stocks etc.
2. What are the documents used for financial analysis?
The three main documents used for financial analysis are:
i.) Balance Sheet:
A balance sheet is a statement showing the assets, liabilities, and capital of a company for a specific time. This statement is helpful in showing the company's current financial position than the expected performance. The main element of the balance sheet is the assets and liabilities.
ii.) Cash flow statement:
Cash flow statement keeps into account the company's performance over a specific period of time. Cash flow statement helps to show the actual money the company has generated. It shows the company's ability to manage inflow and outflow of cash.
iii.) Income statement:
This statement is similar to cash flow statement. The main parts of an income statement are revenue generated and expense incurred and it also shows net profit or loss. This statement is also known as the profit and loss account and it shows the company's performance over a certain period of time.
3. What are the different elements that show the company's financial health?
To check the company's financial health three elements needs to be assessed. The elements are:
It indicates the company's ability to pay its expenses. It refers to the availability of cash to pay short-term debts, accounts payable and other expenses and liabilities. Most of the time inward flow of cash i.e. income is uncertain and hence, the outflow is not flexible. The company should maintain a balanced amount of cash to pay salaries and to pay to their creditors on time. In order to ensure adequate liquidity they need to maintain their current asset to current liabilities ratio.
Leverage can be defined as an investment strategy by using borrowed money. A company having a high level of debt than equity is known as a highly leveraged company. For financial analysis, leverage is an important factor which is assessed by bankers and investors. A high leverage ratio involves risk but there is also a potential for higher returns.
It refers to the ability of the company or business to make a profit. The portion left after paying all the expenses including the expenses generated while conducting business activity is known as profit. There are many ways in which profitability can be analyzed using different profitability ratios.
4. What are the key responsibilities of a financial analyst?
The key responsibilities of a financial analyst are as follows:
i.) Monitor and create financial models for making business decisions, planning and forecasting and also to support the valuation.
ii.) Improve financial performance of the company through analysis of financial results.
iii.) Identify trends and recommend action plans to the management.
iv.) Help to take decisions regarding capital budgeting and expenditure planning processes.
v.) Reconcile data and check if it matches the incoming and outgaining data.
vi.) Conduct analysis that can be compared and do market research to support internal financial analysis.
vii.) Help in forecasting and analyzing actual plans with the forecast made.
viii.) Helps to take decisions regarding investments.
ix.) Responsible to have updated information about the market conditions and trends.
x.) Maintain spreadsheet and dashboards to aid their analysis.
5. What are the challenges faced by the financial analyst?
Finance is a very fast passed industry. It is ever changing and is constantly updating. Being a financial analyst you need to keep yourself updated. Also, finance is a very data-driven industry. The role of an analyst involves analyzing and interpreting the financial statements, market trends and other conditions to help the company make decisions which are at times very challenging.
Getting the complex data and interpreting and aggregating the data are at times very difficult task for the financial analyst. However, with the right training and the tools available makes the job of the financial analyst easy and helps them to overcome these challenges.
6. What are the benefits of being a financial analyst?
An analyst plays a very important part in every business. Apart from the challenges, a financial analyst gets an opportunity to pick up the industry of his/her choice. This career is filled with a lot of opportunities. With the flexibility of choosing the industry you also get the opportunity to develop strategies for the company.
As an analyst, you have a crucial role to play to gather important information which helps the management to make important business decisions. This job role also gives you an opportunity to develop new skills. It also gives you an opportunity to create financial models and enables you to participate in business processes. Also as an analyst, you can develop a strong professional network which will be an asset to you throughout your career.
7. What is Financial Modeling?
Financial modeling is a process which helps the company to understand and forecast its financial performance into the future in order to assess its risk and return profile.Based on the available information calculations are performed and recommendations are made. Finance model is structured around the three financial statements i.e. the balance sheet, income statement and the cash flow statement.
A financial model is used to make important business decisions regarding investments, mergers, and acquisitions etc.
8. As a financial analyst, why is it necessary to build a financial model?
Building a financial model is an important function of a financial analyst. A financial model is an essential tool which helps to make business decisions. It is a tool that is built to forecast the financial position of the business in future.
The financial model helps to make decisions regarding the following:
i.) Investment in a certain company.
ii.) Investment in a certain project.
iii.) To decide on mergers and acquisitions.
iv.) To do any corporate transactions.
v.) To raise capital.
vi.) To evaluate investment opportunities.
vii.) To invest in an asset, security etc.
It helps the analyst to test different scenarios and check the potential results. And this helps them to make correct decisions. All these reasons make it necessary for a financial analyst to build a financial model.
9. What is WACC?
WACC stands for Weighted Average Cost of Capital.
It is the rate a company expects to pay on average to finance its assets. The two important elements of WACC are:
i.) Cost of equity
ii.) Cost of debt