Corporate Financial Analysis: A Comprehensive Beginner's Guide to Analyzing Corporate Financial risk, Statements, Data Ratios, and Reports

By Blaine Robertson

In a digital world like this, there is need for individual investors or firms who have interest in small business and even large ones to study the evaluating target companies' financial information by examining the past and current financial statements which includes balance sheet,

• Language: English
• Publisher: Blaine Robertson
• Release date: Jul 26, 2023
• ISBN: 9781088224977

Book preview

Introduction

In a world ruled by numbers, statements, and records, it is pivotal for us to know how to make a proper evaluation and consistent scrutiny of those histories. That is why a fundamental knowledge of those record and how you can evaluate them is required. In the business world, a single digit added or removed can in a strategic position can either destroy the company or can place it in a tight position. In a bid to explain all these record, history and analysis, some financial terminologies and expressions would be used. However, we have made sure to simplify each term and make the description as simple as possible.

The financial analysis made easy and simple for your use. We would dive into the world of business analysis, knowing fully well that the ocean wouldn’t be so deep. This ultimate guide is meant for beginners and those who have little or no knowledge about business analysis. After digesting the contents here, you would be able to make smart financial decisions, engage in professional financial discourse, and even offer recommendations. You would understand when to make investments and when not to. I wouldn’t just pour the knowledge of assets, liabilities, capital, ratios, or balance sheet in your head and leave you wondering with those facts swirling in your head. You would be able to connect the dots and understand the system. Business is basically a cohesive system of cash flows which are controlled by several decisions from analytical tools as well as other financial/economic concepts.

One thing I would ask of you. It is something I usually tell people. Have an open mind. Some concepts here might not go the way you think or expect them to be because I am aware that you have some prior knowledge about business. However, when you open your mind, you would create that access for improved information.

Chapter 1

What Is Financial Analysis?

In 1987, IBM became the most valuable company and was estimated at $105.8 billion. Five years later, the company is estimated to be valued $28.8 billion. No, that is not possible, right? How did this happen? The decline in value was pinned to a strategic error which was made by IBM earlier in 1980. We know that prior to 1981, IBM was the major player in the computer world because they were the primary suppliers of computers to government, universities, and businesses. During this time, computers were not accessible because they were very expensive. People were not able to afford computers. To solve this, 1981, IBM introduced a personal computer (IBM PC). And this release was quick to set that standard for other PCs. Despite this, IBM decided to leave the software development of PCs to other computer firms/cooperation instead of her to develop that unique disk operating system (DOS) for its computer, IBM decided to allow another small company located in Seattle to do the developing. That company is MICROSOFT.

Founded by Bill Gates and Paul Allen in 1975. Gates envisioned that there would be a time computer would find its way into everyday life. This prediction was contrary to that of IBM. While IBM enjoyed her years of abundance from the mid-1980’s even till the end, Microsoft was able to play that major role in the software market throughout that time. Making them key players in the software market. They developed several operating systems, internets, networks, spreadsheets, and even word processor. Making their stand in the software world solid.

With so much, we have said about Microsoft and her success, we are still forced to ask ourselves; how successful was this company at that time? You will only get an answer to that question if your definition of success is quite different from that of the business world. If you’re looking at success in terms of numbers of employees, Microsoft just had 32 employees in 1981 when IBM decided to make use of Microsoft’s DOS, but it grew to 50,500 employees on June 30, 2002, that fiscal year. If you want to consider social impact. Microsoft donates millions of dollars every year to charitable causes like Special Olympics, Boys and Girls Club, etc. Furthermore, Microsoft has been able to support high schools throughout the country in efforts to synchronize technology into that existing curriculum. Furthermore, the company has been able to set up scholarship programs to spark up that flair for computer science and other related technical fields. Besides that, Bill Gates and his wife Melinda did start a foundation which is dedicated to primary health and education alone. Which means that they have been able to contribute several billion dollars to different foundations in the country, outside the country and in other continents like Africa. Some of Microsoft’s competitors state that Microsoft is involved in several monopolistic practices just to hold back competition. Now, you may be wondering, what does this have to do with financial analysis or financial statement? How does the story of Microsoft explain financial statement analysis?

First, in terms of the stock price. Microsoft’s stock per-share, which was adjusted for stock splits moved from $0.10 in 1986 to $26 in 2003. However, Microsoft stock’s price was down from that history of high occurrence, which was over $58 per share in 1999. Furthermore, an analysis of Microsoft’s financial statements shows that there are some reasons for this declining stock price.     

Business is all about financial activities. For us to access the financial status of any venture, there is a need for us to prepare certain statements which are known as financial statements. Why do we have to prepare these statements? First, we need it for decision making. In fact, financial statements are prepared for decision-making purposes. However, the information provided in financial statements may not be helpful when you need to draw a meaningful conclusion. View financial statements as a guide. And that is why we need proper analysis and interpretation of this financial statement.

The financial analysis here involves ascertaining that significant relationship existing between different times of two financial statements with one another in such a way that deduction is drawn from both. Basically, financial statements are divided into two:

These statements are organized at the end of a given period. In fact, they are pointers of profitability as well as financial stability and soundness of the business. It is pivotal here that we state that financial analysis comprises of analysis and interpretation of financial statements. Furthermore, financial statements show that link or connection between the two financial statements; income statement and position statement.  The analysis measures the strength as well as weaknesses of the company or firm. When you make financial analysis, you attempt to the firm's efficiency and performance also. Therefore, the analysis and the interpretation of statements cannot be overemphasized. Furthermore, financial analysis is needed for us to be able to gauge the profitability, financial soundness, as well as prospects of the individual business units. Having said that there is a need for us to understand the purposes of financial analysis.

First, it is needed to measure profits. We all know that the main objective of any business/enterprise is to make profits to get returns on the money invested. Therefore, the financial analysis would help us check if we are really doing this. It would be required for us to know if we are truly earning some money or not so that we would know if the business is worth our time and money. Also, financial capacity helps to know the capacity of payment of interest as well as dividend.

Next, financial statements point the trend of achievements and failures of a firm. What most people do is that they compare the financial statement of the previous years to that of the current year. The trend of purchases, sales, expenses, gross profits, and net profit also can be monitored through financial analysis. Furthermore, you can also compare the value of assets and liabilities of the company. This would help you to predict the business prospect.

Financial statements are also needed to evaluate the potential of the business. The trend which we have mentioned above and other business would provide enough information showing the growth potential of the enterprise.

Furthermore, another purpose of financial statement analysis is to assist the manager in making that comparative study of how companies which are offering similar services cope. These analysis or comparison would help the management know their position with respect to sales, expenses, profitability, and capital utilization.

We cannot talk about the financial statement and financial statement analysis without mentioning that they help to access the