Financial analysis is a very useful tool to understand how a company is doing. It’s a bit like one of these Russian dolls, a matryoshka. You have a good look at it from all sides, and then you find out there’s a level below it. You take a good look at that level, notice all the details, and find out there’s a level below it. And on and on and on. Let’s apply that idea to financial analysis! Financial analysis matryoshka-style!
0:00 Introduction to financial analysis
0:35 Financial analysis: revenue
2:05 Organic revenue growth
3:30 Financial analysis: profitability
5:35 Financial analysis: cash flow
7:38 Analyzing liquidity and solvency
8:35 Balance sheet analysis
Financial analysis starts with revenue: the goods or services that a company delivered to its customers.
As the next step in our financial analysis, we move from revenue analysis to profitability analysis.
From profitability analysis we move to cash flow analysis. Does the company’s profitability translate to cash flow (money moving into its bank accounts)?
If revenue growth, margin improvement, and free cash flow generation are indicators of financial health, then their opposites must be indicators of an unhealthy financial situation, right? Revenue decline, margin deterioration, and free cash flow decline as indicators of an unhealthy financial situation? Well, that’s only part of the story! The most important question in financial analysis might actually be: can the business survive in times of turbulence? How vulnerable or fragile is the company, particularly to unexpected events? That’s where financial analysis of solvency and liquidity can help, but only for those elements of risk that are in plain view on the financial statements, as hidden risk is by definition hidden.
Philip de Vroe (The Finance Storyteller) aims to make accounting, #financialanalysis and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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