How can you conduct a financial analysis of a company?

1 Gather data

The first step is to gather the data you need for the analysis. You will need the company's financial statements, such as the income statement, the balance sheet, and the cash flow statement, for at least the past three years. You will also need the company's annual report, which provides an overview of its operations, strategy, goals, and risks. Additionally, you may want to collect some industry and market data, such as the company's competitors, customers, suppliers, and economic trends, to compare and benchmark the company's performance.

2 Calculate ratios

The second step is to calculate some financial ratios that measure different aspects of the company's performance. Financial ratios are numerical values that express the relationship between two or more financial items and can help you assess the company's profitability, liquidity, solvency, efficiency, and growth potential. For instance, profitability ratios like gross margin, operating margin, net margin, return on assets, and return on equity measure how well the company generates income from its sales and assets. Liquidity ratios like current ratio, quick ratio, and cash ratio show how well the company can meet its short-term obligations with its current assets. Solvency ratios such as debt-to-equity ratio, debt-to-assets ratio, and interest coverage ratio demonstrate how well the company can meet its long-term obligations with its equity and earnings. Efficiency ratios like inventory turnover, receivables turnover, payables turnover, and asset turnover indicate how well the company manages its resources and operations. Lastly, growth ratios including revenue growth, earnings growth, and dividend growth demonstrate how well the company expands its business and rewards its shareholders.

3 Analyze trends

The third step is to analyze the trends and patterns of the financial ratios over time. You can use graphs, charts, tables, or other visual tools to display the changes and variations of the ratios across different periods. You can also compare the ratios with the industry averages or the company's peers to see how the company performs relative to its competitors and market. You should look for any significant increases or decreases, any consistent or inconsistent patterns, any strengths or weaknesses, and any opportunities or threats that the ratios reveal.

4 Evaluate performance

The fourth step is to evaluate the overall performance of the company based on the financial ratio analysis. You should summarize the main findings and conclusions that you derived from the previous step. You should also identify the key drivers and factors that affect the company's performance, such as its business model, strategy, competitive advantage, market position, customer base, product mix, cost structure, revenue streams, risk exposure, and growth potential. You should highlight the strengths and weaknesses of the company, as well as the opportunities and threats that it faces.

5 Make recommendations

The fifth step is to make some recommendations based on the financial performance evaluation. You should provide some suggestions and action plans that can help the company improve its performance, overcome its challenges, or exploit its opportunities. You should also state the expected outcomes and benefits of your recommendations, as well as the potential risks and costs involved. You should support your recommendations with relevant data and evidence from the financial analysis.

6 Present results

The final step is to present the results of your financial analysis to your intended audience, such as investors, lenders, managers, or stakeholders. You should prepare a clear, concise, and comprehensive report that summarizes the main points and findings of your analysis, as well as your recommendations and conclusions. You should also include the data sources, methods, assumptions, and limitations of your analysis. You should use appropriate formats, styles, and visuals to communicate your message effectively and persuasively.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?