Examples of analysis in the following topics:
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- In addition to using financial ratio analysis to compare one company with others in its peer group, ratio analysis is often used to compare the company's performance on certain measures over time.
- Trend analysis can be performed in different ways in finance.
- Fundamental analysis, on the other hand, relies not on sentiment measures (like technical analysis) but on financial statement analysis, often in the form of ratio analysis.
- Creditors and company managers also use ratio analysis as a form of trend analysis.
- Analyze the benefits and challenges of using trend analysis to evaluate a company
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- Balance sheet analysis is process of understanding the risk and profitability of a firm through analysis of reported financial information.
- Balance sheet analysis consists of 1) reformulating reported Balance sheet, 2) analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and adjusted Balance sheet.
- Two types of ratio analysis are performed: 3.1) Analysis of risk and 3.2) analysis of profitability:
- Risk analysis consists of liquidity and solvency analysis.
- Cash flow analysis is also useful.
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- Financial statement analysis, also known as financial analysis, is the process of understanding the risk and profitability of a company through the analysis of that company's reported financial information.
- There are four methods for making these types of comparisons: vertical analysis, horizontal analysis, ratios, and trend percentages.
- In a vertical analysis, each item is expressed as a percentage of a significant total.
- This type of analysis is especially helpful in analyzing income statement data .
- In vertical analysis each item is expressed as a percentage of a significant total.
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- Two types of ratio analysis are analysis of risk and analysis of profitability:
- Risk Analysis: Analysis of risk detects any underlying credit risks to the firm.
- Risk analysis consists of liquidity and solvency analysis.
- Profitability analysis: Analyses of profitability refer to the analysis of return on capital.
- Explain how a company would use the financial statements to perform risk analysis and profitability analysis
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- Sensitivity analysis determines how much a change in an input will affect the output.
- Sensitivity analysis is a statistical tool that determines how consequential deviations from the expected value occur.
- Sensitivity analysis can be useful for a number of reasons, including:
- The sensitivity analysis entails changing each variable and seeing how that changes the output .
- Sensitivity analysis determines how much an output is expected to change due to changes in a variable or parameter.
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- Scenario analysis is a process of analyzing decisions by considering alternative possible outcomes.
- Scenario analysis is a strategic process of analyzing decisions by considering alternative possible outcomes (sometimes called "alternative worlds").
- For example, a firm might use scenario analysis to determine the net present value (NPV) of a potential investment under high and low inflation scenarios.
- The purpose of scenario analysis is not to identify the exact conditions of each scenario; it just needs to approximate them to provide a plausible idea of what might happen.
- This scenario analysis shows how changes in factors like yield and transport cost can affect profits.
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- Regression Analysis is a causal / econometric forecasting method that is widely used for prediction and forecasting improvement.
- Regression Analysis is a causal / econometric forecasting method.
- In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables.
- A large body of techniques for carrying out regression analysis has been developed.
- Regression analysis shows the relationship between a dependent variable and one or more independent variables.
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- Ratio analysis using financial statements includes accounting, stock market, and management related limitations.
- First of all, ratio analysis is hampered by potential limitations with accounting and the data in the financial statements themselves.
- Ratio analysis using financial statements as a tool for performing stock valuation can be limited as well.
- While the weak form of this hypothesis argues that there can be a long run benefit to information derived from fundamental analysis, stronger forms argue that fundamental analysis like ratio analysis will not allow for greater financial returns.
- These audiences also see limits to ratio analysis as a predictor of stock market returns.
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- With a few exceptions, the majority of the data used in ratio analysis comes from evaluation of the financial statements.
- With a few exceptions, such as ratios involving stock price, the majority of the data used in ratio analysis comes from the financial statements.
- The evaluation of a company's financial statement analysis is a form of fundamental analysis that is bottoms up.
- While analysis of a company's prospects can include a number of factors, including understanding the economic situation or the industry or sentiment about the company or its products, ratio analysis of a company relies on the specific company financials.
- Evaluating financial statements involves getting the numbers in order and then using these figures to perform ratio analysis.
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- Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
- Ratio analysis is one of three methods an investor can use to gain that understanding.
- Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information.
- Ratio analysis is a foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
- Financial ratio analysis allows an observer to put the data provided by a company in context.