Financial statements are considered an important tool to assess the financial health of a business. This article will guide you how to analyze financial statements.
What is corporate financial statement analysis?
Analyze the financial statements of the enterprise is the process of scrutinizing the financial performance based on the data presented in the report. This process provides investors and stakeholders with a more detailed view of the actual financial situation of the business, thereby supporting investment and management decisions.
Typically, a financial report will consist of three main parts: a company's cash flow statement, a statement of business performance, and a balance sheet. The analysis not only provides an overview but also helps parties gain a deeper understanding of how the business operates financially, assisting in planning future strategies.
Although financial ratios have their own standards, a high ratio does not always reflect the overall health of a business. The goal of financial statement analysis is to explore and connect the ratios, thereby providing deeper and more comprehensive assessments of the company's financial situation.
>>> See more articles: What is financial investment? How to invest effectively to make money profitable
The role of bank financial statement analysis
Financial statement analysis plays an essential role for many interest groups, including banks, businesses, investors and suppliers.
For banks: Financial analysis helps banks grasp the financial stability and debt repayment capacity of enterprises. Based on that, banks can determine the appropriate loan amount as well as the appropriate repayment period.
For businesses: This analysis allows businesses to have an overview of operational efficiency, helping leaders make strategic decisions for sustainable development.
For investors: Through financial statement analysis, investors better understand the financial status of the business, thereby making appropriate investment decisions.
For suppliers: By reviewing financial statements, suppliers can assess a business's ability to pay before accepting sales on credit.
The Importance of Financial Statements to Users
Financial statements are a tool that provides important data on the financial situation and operations of a business. The analysis process helps stakeholders better understand the financial capacity of the business, helping them make appropriate and timely decisions.
Business Financial Health Assessment
Financial statement analysis helps to evaluate important indicators such as profitability, liquidity and financial management efficiency. Through these indicators, investors and stakeholders can determine the current financial situation, operating efficiency and growth potential of the enterprise.
Tools to Support Accurate Business Decision Making
Financial analysis not only helps users have an overview but also supports them in making reasonable business decisions, from investing to lending or adjusting business strategies. At the same time, financial analysis also helps predict future financial trends, thereby helping stakeholders make more proactive decisions.
Notes when analyzing financial statements of enterprises
When analyzing financial ratios, there are several important factors to keep in mind:
- Compare with previous period data: This helps to track the changes and growth of the business over different periods.
- Compare with businesses in the same industry: Comparing with competitors in the industry helps identify the strengths and weaknesses of the business.
- Consider the timing and period of the figures: Balance sheet figures typically represent a specific point in time, while income statement figures represent a period.
Instructions for analyzing financial reports of companies and businesses
How to read and analyze corporate financial reports accurately
To maintain stability in business operations, businesses need to manage working capital well, ensure sufficient ability to pay short-term debts and maintain reasonable inventory levels. Therefore, understanding how to analyze financial statements is very important because if debts are not paid promptly, the business may face many risks of operational interruption. Some financial indicators below will help assess the financial situation of the business.
Current Solvency Ratio
This ratio shows the extent to which a company's short-term assets can be converted into cash to pay off short-term liabilities. The formula is as follows:
Formula for calculating Current Ratio = Current Assets / Current Liabilities
If this ratio is below 1, the business may have difficulty paying short-term debts and is at risk of liquidity problems.
Interest Coverage Ratio
A company's debt includes its accounts payable to suppliers and its loans to other related parties. If it uses debt, the company must pay its operating costs, i.e. interest. This ratio is calculated as:
Interest Coverage Ratio = Profit before tax / Interest payable
This index helps assess the ability of a business to pay interest expenses.
Analysis receivables turnover ratio
The receivables turnover ratio helps assess the speed of debt collection from customers. The formula is as follows:
Formula for calculating accounts receivable turnover = Sales revenue / Average accounts receivable
This index indicates the ability of a business to collect its debts.
Financial leverage ratio analysis in the report
Financial leverage is measured by the debt ratio, which reflects the proportion of debt in the total capital of the enterprise. The formula is as follows:
Debt ratio formula = Liabilities / Total capital
This ratio helps a business determine its level of financial risk based on its debt ratio.
Profitability Analysis
Profit is an important factor in evaluating the effectiveness of business operations. Below are some commonly used indicators to analyze profitability.
Return on Sales (ROS)
The return on sales (ROS) ratio shows how much profit is generated from each dollar of net revenue:
How to calculate return on sales (ROS) = Profit after tax / Net revenue
Gross profit margin analysis (or Gross profit margin)
This index reflects gross profit from net revenue, evaluating the effectiveness of production cost management:
How to calculate gross profit margin = Gross profit / Net revenue
Analysis of the return on assets (ROA) ratio
Return on assets (ROA) shows how much profit each dollar of assets generates:
How to calculate ROA index = Profit after tax / Average total assets
Analysis of return on equity (ROE) ratio
The ROE ratio shows the profit a company will earn for each dollar of equity:
How to calculate ROE = Profit after tax / Average equity
Conclude
Financial statement analysis is an important step to help understand and evaluate the financial situation of the enterprise. This process contributes greatly to making strategic business decisions, creating a foundation for the sustainable development of the enterprise, especially in the context of increasingly fierce market competition. Therefore, understanding how to analyze financial statements is an important factor for investors.
To support businesses, HVA Group provides essential guidance and information on how to effectively analyze financial statements. However, it is important to remember that financial statement analysis requires ongoing diligence and updating, not a one-time process. When applied correctly how to analyze financial statementsThis process will bring high practical value, contributing to supporting businesses to develop strongly and sustainably in the long term.
