Three of The Most Common Tools of Financial Analysis Are? All Analysis

Three of The Most Common Tools of Financial Analysis Are? All Analysis are listed and discussed in detail in this article.

The most commonly used tools for financial analysis are

Three of The Most Common Tools of Financial Analysis Are? All Analysis
Common Tools of Financial Analysis – Photo Source:

Tools of Financial analysis are mainly used for the testing of monetary facts to statistically evaluate the functioning of the business and create futuristic references and prospects.

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What then is the meaning of the term Financial Analysis?

Financial analysis simply includes the use of economic facts and figures to make statistical analyses for financial examinations and further studies.

Most statistical data can be sourced from several platforms such as Bloomberg, CapitalIQ, PitchBook, EDGAR, and SEDAR which mainly display valid online figures.

These figures help to achieve the aim of financial analysis which is to statistically evaluate the functioning of the business and create futuristic references and prospects.

The common tools of Financial Analysis will be discussed in their order of relevance. These include the following;

Vertical, Horizontal, Leverage, Growth, Profitability, Liquidity, Efficiency, Cash Flow, and Rates of Return analyses.

1. Vertical Analysis or Common Size Statements

This is the first and most common tool of financial analysis including the observation and careful study of the revenue statement.

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This revenue statement is used in the determination of the business level of profit and loss, especially in a fiscal year.

Vertical analysis helps in the comparison of one company’s profit in contradiction to other companies in a similar business line. This analysis is used to review the marginal strength or weakness as well as the performance of the business.

2. Horizontal or Comparative Analysis

This is a second financial tool that includes taking into consideration the business activities of between five to ten years (or more) and statistical facts and contrasting the figures with one another to verify the internal and external growth rate.

This is particularly the duty of the statistician to forecast and determine if the business is growing incrementally or is moving at a deteriorating rate and proffer possible solutions to the ravaging puzzle.

This monetary analysis is mostly used by companies using the program Microsoft excel to study the trends in the facts and perform further analysis.

3. Leverage Analysis

Leverage ratios are one of the most common analytical tools analysts use to statistical analysis the functioning of the business.

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Common examples of ratios mostly used by companies include equity debt and betide ratio. Equity debt is the ratio that accounts for the value of the entire debt including the total shareholder’s equity and liabilities.

On the other hand, the EBITDA ratio in the view of an accountant is the net debt to earnings before interest, taxes, depreciation, and amortization popularly abbreviated as (EBITDA).

4. Growth Rates

This tool uses regression analysis of past growth rates and makes forecasts for the future. This growth rate uses measures such as year-over-year measures for contracting different time-series data, and regression which is the use of arithmetical methods used to evaluate the correlation between two variables known as the dependent and the independent variables.

5. Profitability Analysis

Profitability is a tool that stays strictly with the income statement of the company. Income statements showcase the profit and loss of the business over a specific period of time usually one year. Most models of profitability are Gross margin Gross, EBITDA margin ratio, and net profit margin among others.

6. Liquidity Analysis

This is a tool of financial analysis that is primarily concerned with the balance sheet by designating the well-being of the company. It uses models such as the current ratio, acid test, cash ratio, net working capital, and the Current Ratio Formula.

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7. Efficiency Analysis

Efficiency ratios are mostly trusted because it is programmed and run with robustness. This financial analysis shows the company’s decision-making toward income creation.

Also, the common efficiency ratios models are asset turnover ratio or total asset turnover ratio, fixed asset turnover ratio, cash conversion ratio, inventory turnover ratio, etc.

8. Cash Flow

Cash flow is a tool of financial analysis that summarizes the economic activities of the business in monetary terms. Common models used in cash flow analysis are Operating Cash Flow (OCF), Free Cash Flow (FCF), Free Cash Flow to the Firm (FCFF), and Free Cash Flow to Equity (FCFE).

9. Rates of Return

Finance professionals such as investors and lenders use this financial analysis to determine the rate of return that will be realized when money is staked.

Such models include Return on Equity (ROE), Return on Assets (ROA), Return on invested capital (ROIC), Dividend Yield, Capital Gain, Accounting rate of return (ARR), and Internal Rate of Return (IRR).

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Conclusively, these tools of financial analysis assist in the appraisal of business functions. Thus, horizontal, vertical, and Leverage ratios are the most common tools for financial analyses.

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