Financial analysis is a process of researching the results of an enterprise with the goal of identifying reserves for increasing value and ensuring further development. Based on the results obtained, management decisions are made, a strategy is developed.
Kinds
Investigate the activities of the enterprise in several ways. First, the specific gravities of the reporting items in the final indicator are calculated. Horizontal analysis (temporary) reflects a change in indicators compared to the previous period. Trend comparisons of data with previous periods are carried out in order to formulate a plan. The coefficients show the ratio of individual balance sheet items, and the factor analysis displays the reasons for their change.
The company most often carried out structural dynamic studies and calculated indicators (liquidity, financial stability, profitability, turnover and market activity). In this case, the following factors are taken into account:
- the value of the coefficients is affected by the accounting policy of the organization;
- diversification of activities greatly complicates the analysis of indicators by industry;
- normative and optimal coefficients are different concepts.
Analysis of balance sheet items shows:
- volume of assets, their ratio, sources of financing;
- what articles are changing at a faster pace, and how does this affect the balance sheet structure;
- share of reserves and remote sensing;
- the amount of equity, the degree of dependence of the company on borrowed resources;
- distribution of loans by maturity;
- level of debt to the budget, banks and employees.
Vertical and horizontal balance analysis
The financial statements show the structure of the property and the sources of its financing. Vertical analysis shows the proportion of individual balance sheet items. Based on relative estimates, a comparison is then made of performance indicators. The calculation algorithm is simple: the share of current fixed assets in the total balance sheet is determined, and then the reasons for their change are analyzed.
Horizontal analysis consists in constructing tables that display the value of the liability (asset) at the beginning and end of the year in absolute and relative values and their changes. If the settlement period is more than a year, the basic growth rates are determined.
These two types of research complement each other. In vertical analysis, elements with a large specific gravity are distinguished, in horizontal analysis, emphasis is placed on spasmodic changes.
Asset Dynamics
The balance sheet reflects property and sources of its formation. If the currency (total) for the year increases, it is necessary to identify the reasons for the change. The increase in overdue receivables indicates an ill-conceived sales policy, which can lead to losses. By providing a commercial loan, the company advances its customers, shares part of the income. But if payments from counterparties are delayed, it is forced to take loans to ensure current business activities. If fixed assets are updated, this means that the enterprise is functioning efficiently. The increase in cash indicates an increase in liquidity. Ideally, the money should be enough to pay off 50% short-term liabilities. Surplus is worth investing.
OA
Current assets may decrease due to a reduction in production potential, revaluation of fixed assets in accounting. In other cases, this indicates the formation of a mobile asset structure, acceleration of their turnover.
Stocks
The horizontal analysis method allows you to compare the value of indicators with previous periods. When studying the composition of stocks, attention should be paid to changes in the volume of raw materials, production assets, state enterprises, and goods for resale. The increase in the share of stocks may indicate:
- increase production capacity;
- the desire to protect funds from impairment by investing in stocks;
- inefficiencies of the strategy, as a result of which the majority of OA is immobilized in reserves with low liquidity.
Changes in liabilities
Equally important is the ratio of equity to borrowed capital. The greater the proportion of personal funds, the higher the financial stability of the enterprise, it is less dependent on creditors, it does not threaten bankruptcy. A significant proportion of borrowed capital indicates a threat. Loans and borrowings will have to be repaid sooner or later. If the company has insufficient funds, it may go bankrupt. The absence of borrowed funds generally indicates a high financial stability. But it is important to remember that if profitability exceeds the price of attracting resources, the overall efficiency of the use of funds increases. retained earnings can also be a source of funding for the organization.
Example
We will conduct a horizontal analysis of the balance sheet of the enterprise. To do this, we calculate the absolute and relative deviations of each reporting item. The table of horizontal analysis will help us with this.
| Balance (thousand rubles) | 2013 | 2014 | Absol | Relation | ||
| Current assets | ||||||
| Cash | 17 | 12 | -6 | -33 % | ||
| Central Bank | 54 | 14 | -40 | -74 % | ||
| DZ | 271 | 389 | 118 | 44 % | ||
| Bills received | 47 | 43 | -5 | -10 % | ||
| Goods and materials | 51 | 45 | -6 | -12 % | ||
| Advances | 11 | 10 | -1 | -9 % | ||
| TOTAL OA | 452 | 513 | 61 | 13 % | ||
| OS | ||||||
| Buildings | 350 | 358 | 8 | 2 % | ||
| Depreciation | 84 | 112 | 28 | 34 % | ||
| Residual value | 267 | 246 | -20 | -8 % | ||
| Investments | 15 | 15 | 0 | 0 % | ||
| GP | 28 | 28 | 0 | 0 % | ||
| Goodwill | 11 | 6 | -5 | -45 % | ||
| TOTAL OS | 321 | 295 | -25 | -8 % | ||
| ASSETS | 773 | 808 | 35 | 5 % | ||
| Short-term debt | ||||||
| KZ | 143 | 97 | -46 | 32 % | ||
| Promissory notes issued | 38 | 33 | -5 | 13 % | ||
| Accrued liabilities | 55 | 86 | 31 | 56 % | ||
| Loan | 7 | 11 | 4 | 62 % | ||
| Current portion of long-term debt | 5 | 5 | 0 | 0 % | ||
| Debt to the budget | 34 | 35 | 1 | 3 % | ||
| Short-term debt, total | 281 | 267 | -15 | -5 % | ||
| Long term debt | ||||||
| Bonds for payment | 80 | 80 | 0 | 0 % | ||
| Long term loans | 15 | 10 | -5 | -33 % | ||
| Delayed NPP | 6 | 4 | -1 | -21 % | ||
| Long term. debt., total | 101 | 94 | -6 | -6 % | ||
| Equity | ||||||
| Preference shares | 30 | 30 | 0 | 0 % | ||
| Ordinary shares | 288 | 288 | 0 | 0 % | ||
| Additional capital | 12 | 12 | 0 | 0 % | ||
| retained earnings | 61 | 117 | 56 | 93 % | ||
| TOTAL SC | 391 | 447 | 56 | 14 % | ||
| TOTAL Liabilities | 773 | 808 | 35 | 5 % | ||
Horizontal analysis of the asset balance showed that fixed assets for the reporting period were not updated. The total assets increased by 35 thousand rubles, and liabilities decreased. The changes occurred due to the growth of retained earnings. The amount of working capital increased by 60 thousand rubles. due to receivables. Part of the money was used to pay short-term debt (5.23%). The company compensated for this reduction by an increase in liabilities, which in this example were one of the sources of financing. Horizontal financial analysis shows that the ratio of SK and ZK is approximately 55:45. A positive trend is a decrease in the share of loans by 5% and long-term loans by 6%. There were no changes in the structure of equity for the reporting period. For more information, consider other indicators.
Profit and Loss Statement
For clarity, we decided to use the table again
| Profit report | 2013 | 2014 | Absol | Rel |
| Revenue | 1230000 | 1440000 | 210000 | 17 % |
| Cost price | 918,257 | 1106,818 | 188,6 | 21 % |
| Material costs | 525,875 | 654,116 | 128,2 | 24 % |
| Salary | 184,5 | 201,6 | 17,1 | 9 % |
| Production costs | 167,05 | 214,12 | 47,1 | 28 % |
| Depreciation of tangible assets | 35,832 | 31,982 | -3,9 | -11 % |
| Depreciation of intangible assets | 5 | 5 | 0,0 | 0 % |
| Gross profit | 311,744 | 333,182 | 21,4 | 7 % |
| Administrative costs | 55,35 | 86,4 | 31,1 | 56 % |
| Marketing Costs | 129,15 | 122,4 | -6,8 | -5 % |
| Operating profit | 127,244 | 124,382 | -2,9 | -2 % |
| Result from the sale of assets | 1,25 | 6,15 | 4,9 | 392 % |
| Dividends | 500 | 1520 | 1020,0 | 204 % |
| Profit before payment% | 128,994 | 132,052 | 3,1 | 2 % |
| % on bonds | 11,2 | 11,2 | 0,0 | 0 % |
| % on long-term debt | 3,2 | 2,4 | -0,8 | -25 % |
| % on the loan | 1,08 | 1,56 | 0,5 | 44 % |
| Profit before tax | 113,5 | 116,9 | 3,4 | 3 % |
| NPP | 34,1 | 35,1 | 1,0 | 3 % |
| State of emergency | 79,4 | 81,8 | 2,4 | 3 % |
Horizontal analysis of the profit and loss statement shows that for the year, revenue increased by 17%, and gross income - only by 7%. An undesirable change occurred due to growth at a higher rate of the cost of materials (24%) and production costs (28%). Operating profit decreased by 2% due to a significant (56%) increase in administrative costs. Despite the increase in costs, net profit increased by almost 3% due to a decrease in interest payments and an increase in profit from non-core activities (sale of assets).
What else to look for
Horizontal analysis, an example of which was presented earlier, allows you to make general conclusions about the financial condition of the organization. In order to correctly determine the reasons for the change in the structure of assets, it is necessary to further study Form No. 5. An increase in an intangible asset such as “WIP” indicates the diversion of resources to unfinished construction projects. This negatively affects the current situation of the organization. The presence of long-term financial investments indicates the intensification of investment activity. It should further evaluate the liquidity, profitability and risk of equity securities.
Availability in the first balance section patents and licenses indirectly reflect the financing of intellectual property. A detailed analysis of the use of intangible assets is important for the management. It cannot be carried out according to the balance sheet alone. Other types of reporting should be added.
