what is financial analysis 
financial analysis is the process of evaluating businesses projects budgets and other finance related transactions to determine their performance and suitability typically financial analysis is used to analyze whether an entity is stable solvent liquid or profitable enough to warrant a monetary investment investopedia nez riazunderstanding financial analysisfinancial analysis is used to evaluate economic trends set financial policy build long term plans for business activity and identify projects or companies for investment this is done through the synthesis of financial numbers and data a financial analyst will thoroughly examine a company s financial statements the income statement balance sheet and cash flow statement financial analysis can be conducted in both corporate finance and investment finance settings one of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company s own historical performance for example return on assets roa is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability this ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis there is no single best financial analytic ratio or calculation most often analysts use a combination of data to arrive at their conclusions corporate financial analysisin corporate finance the analysis is conducted internally by the accounting department and shared with management in order to improve business decision making this type of internal analysis may include ratios such as net present value npv and internal rate of return irr to find projects worth executing many companies extend credit to their customers as a result the cash receipt from sales may be delayed for a period of time for companies with large receivable balances it is useful to track days sales outstanding dso which helps the company identify the length of time it takes to turn a credit sale into cash the average collection period is an important aspect of a company s overall cash conversion cycle a key area of corporate financial analysis involves extrapolating a company s past performance such as net earnings or profit margin into an estimate of the company s future performance this type of historical trend analysis is beneficial to identify seasonal trends for example retailers may see a drastic upswing in sales in the few months leading up to christmas this allows the business to forecast budgets and make decisions such as necessary minimum inventory levels based on past trends investment financial analysisin investment finance an analyst external to the company conducts an analysis for investment purposes analysts can either conduct a top down or bottom up investment approach a top down approach first looks for macroeconomic opportunities such as high performing sectors and then drills down to find the best companies within that sector from this point they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company s fundamentals a bottom up approach on the other hand looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis looking at past performance and expected future performance as investment indicators bottom up investing forces investors to consider microeconomic factors first and foremost these factors include a company s overall financial health analysis of financial statements the products and services offered supply and demand and other individual indicators of corporate performance over time financial analysis is only useful as a comparative tool calculating a single instance of data is usually worthless comparing that data against prior periods other general ledger accounts or competitor financial information yields useful information types of financial analysisthere are two types of financial analysis as it relates to equity investments fundamental analysis and technical analysis fundamental analysis uses ratios gathered from data within the financial statements such as a company s earnings per share eps in order to determine the business s value using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company the analyst is able to arrive at an intrinsic value for the security the end goal is to arrive at a number that an investor can compare with a security s current price in order to see whether the security is undervalued or overvalued technical analysis uses statistical trends gathered from trading activity such as moving averages ma essentially technical analysis assumes that a security s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements technical analysis attempts to predict market movements by looking for patterns and trends in stock prices and volumes rather than analyzing a security s fundamental attributes horizontal vs vertical analysis