• Skip to primary navigation
  • Skip to content
  • Skip to primary sidebar
  • Skip to footer
EDUCBA

EDUCBA

MENUMENU
  • Resources
        • Investment Banking

          • Investment Banking Jobs Offer
          • Current Ratio
          • Discounted Cash Flows
        • Investment Banking
        • Finance Formula

          • CFA vs FRM
          • Net Working Capital Formula
          • Free Cash Flow to Firm
        • Finance Formula
        • Valuation

          • Equity Research Career
          • Return on Equity
          • Methods to calculate WACC
        • Finance Valuation
        • Others

          • Resources (A to Z)
          • Accounting Fundamentals
          • Corporate Finance Basics
          • Financial Modeling in excel
          • Credit Research Fundamentals
          • Asset Management Tutorial
          • Trading for dummies
          • View All
  • Free Courses
  • All Courses
        • Certification Courses

          Financial Analyst Course
        • All in One Bundle

          Financial-Analyst-Bundle
        • Investment Banking Training

          Investment-Banking-Training
        • Others

          • Financial Modeling Course
          • Equity Research Course
          • Private Equity Training Course
          • Business Valuation Course
          • Mergers and Acquisitions Course
          • View All
  • 250+ Courses All in One Bundle
  • Login

Financial Analysis Example

Home » Finance » Blog » Accounting Fundamentals » Financial Analysis Example

 Financial Analysis Example

Introduction to Financial Analysis Example

Financial analysis example is the investigation of business results and financial reports with the aim to understand the performance of the entity. The analysis covers the facets of the profitability, liquidity, and solvency of the business. This, in turn, helps to make decisions with regards to investing, policy or determining the future state of action. The analysis can take place in corporate finance or for investment finance. The corporate finance deals with NPV, IRR calculation of a prospective project whereas investment finance analysis deals with understanding the competitive benefit in investing amongst a slew of competitive firms for an investor.

Financial analysis exists in various forms and some of the forms are discussed below:

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Examples of  Financial Analysis (With Excel Template)

Let’s take an example to understand the calculation of the Financial Analysis in a better manner.

You can download this Financial Analysis Example Excel Template here – Financial Analysis Example Excel Template

#1  Financial Analysis Example – Liquidity Ratio Analysis

It is a measure of the timeliness with which an entity would be able to clear out its imminent liabilities. The creditworthiness of an entity depends on how the number of liquid assets it possesses. An unfavorable ratio would mean uncertainty with regards to the fulfillment of the external liabilities and thereby raising questions on its future.

This ratio analysis though should be considered the payment cycle of the entity and the seasonal fluctuation. For example- if the payment cycle is in progress, the cash with the entity would obviously be low thereby not giving the correct picture of the financial situation. The ratios could be of the following kinds

Cash Ratio

  • Cash Ratio compares the amount of cash to the immediate short term liabilities. If the business were to be dissolved today, would the cash be adequate to cover the short term liabilities that it has at that point?

Quick Ratio

  • Quick Ratio is the measure of the cash and the future cash to be received (receivables from debtors) to repay the current liabilities that the firm has. Quick assets involve assets that can be converted into cash within 90 days. This ratio gives an indication of the ability of the firm to cover its liability obligations without resorting to the long term assets. More is the ratio, better is the ability of the firm to cover itself from foreseeable liabilities

Current Ratio

  • It measures the current assets that a firm has against the payment of the current liabilities. Here, the current would mean either convertible into cash in the next one year or due to be re-payed in the next one year. It is one of the most important ratios to look at the liquidity ability of the concern.

The below example looks at Entity A and the determination of the liquidity ratios for a particular point of time:

Popular Course in this category
Cyber Week Sale
Accounting Course Bundle (39 Courses, includes IFRS & US GAAP) 39 Online Courses | 160+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.8 (2,168 ratings)
Course Price

View Course

Related Courses
Finance for Non Finance Managers Course (7 Courses)Cost Accounting Course (5 Courses)US GAAP Course (12 Courses with Online Certificate)

 Financial Analysis Example-1.1
 Financial Analysis Example-1.2..

#2  Financial Analysis Example – Trend Analysis

This tool plots the performance of a given variable over a period of time to find out the various features, predict the future course of action and weave methods around it considering such a trend to continue in the near future.

For example: if the profit of concern is decreasing every year by around 5%, there is a cause to check the factors that are influencing such movement. It could be due to external factors like change in market conditions or could be driven by internal situations like cost increase or decrease in revenue. First, the trend analysis will tell us the cause and then it would indicate if such movement would continue in the future as well. If after the analysis, it is determined that the internal factors have very little to do with the movement and that it is beyond the control of the firm, then measures have to be taken to ensure that the unfavorable movement is minimal. This could involve expenditures on certain new assets and/or change the existing processes.

Generally, trend analysis is depicted by line graphs which are a good visual medium to understand the changes happening period over period.

#3  Financial Analysis Example – Rate of Return Analysis

This is generally used in the case of a capital purchase decision-making process. Rate of return is the measure of the increase in returns that the new asset will provide over the cost incurred on it. This analysis could be performed at two stages:

Pre-purchase: This would indicate the expected returns that an asset would bring over a period of time. If the returns are more than the cost incurred discounting at a decided rate of return then it worth to invest in the asset.

Post-purchase: After the asset is utilized in the production, the management might want to do a post facto analysis of how the asset is yielding and compare it to the expectation that they might initially have from the asset. In case, the yield is not up to the mark the management could decide to probably make a decision to sell it at the current market price and come up with an alternative solution that could help create better returns.

Conclusion

Financial analysis is important for decision making to be it for the management or for potential investors. It helps understand the current health of the entity and simplifies the comparison between the entities of the same industry. Also, future forecasts could be made which will help management make decisions.

The analysis is subject to the time period at which it is done. Many times, an entity may be going through a temporary crisis. The analysis at that point will be skewed unfavorably. Also, given how the entity has performed in the past might not necessarily be the best indication of how it is going to perform in the future.

Recommended Articles

This is a guide to the Financial Analysis Example. Here we discuss the introduction and practical example of liquidity ratio analysis, trend analysis, rate of return analysis along with detailed explanation and downloadable excel template. You can also go through our other suggested articles to learn more –

  1. Example of Confirmation Bias
  2. Fixed Costs Example
  3. Vertical Integration Example
  4. Equity Examples

Accounting Course Bundle (39 Courses, includes IFRS & US GAAP)

39 Online Courses

160+ Hours

Verifiable Certificate of Completion

Lifetime Access

Learn More

0 Shares
Share
Tweet
Share
Reader Interactions
Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar
Finance Blog Tutorials
  • Accounting fundamentals
    • Drag-Along Rights
    • Special Journal
    • Interest vs Dividend
    • Direct Materials
    • Accounting Method
    • Return on Sales
    • Calendar Year vs Fiscal Year
    • Contribution Margin Income Statement
    • Activity Based Budgeting
    • Common Size Income Statement
    • Capital Lease vs Operating Lease
    • Insolvency vs Bankruptcy
    • Vertical Analysis of Income Statement
    • Debt vs Equity Financing
    • Adjusted EBITDA
    • LLC vs Inc
    • Return on Average Capital Employed
    • Stocks vs Real Estate
    • Return on Equity
    • Return on Capital Employed
    • Diluted Earnings Per Share
    • Limited Partner vs General Partner
    • Basic EPS
    • Cash Flow Return on Investment
    • Fixed vs Variable
    • Public Company vs Private Company
    • Market Order vs Limit Order
    • Return on Total Assets
    • Hard Cost vs Soft Cost
    • Return on Average Assets
    • Ethereum vs Ethereum Classic
    • Capital Employed
    • Gross Profit Percentage
    • OIBDA
    • Average Collection Period
    • Profit Margin
    • EBITDA Margin
    • Working Capital Turnover Ratio
    • Marginal vs Effective Tax Rate
    • CFO vs Controller
    • Accounting Interview Questions
    • EBITDA
    • Asymmetric Information
    • Days Payable Outstanding
    • Journal Examples
    • Debit vs Credit
    • Lease vs Rent
    • Buying vs Leasing
    • Finance Job From Engineering
    • Days Inventory Outstanding
    • Horizontal Integration Example
    • Revenue Expenditure
    • Accounts Payable Turnover Ratio
    • Statement of Cash Flows
    • Days Sales Uncollected
    • Days Sales Outstanding
    • Statement of Income Example
    • Unadjusted Trial Balance
    • Red Herring Example
    • Revenue vs Turnover
    • Functions of Financial Market
    • Cost of Goods Sold Example
    • Operating Ratio
    • Stock Turnover Ratio
    • Bill of Sale Examples
    • Break Even Analysis Example
    • Financial Analysis Example
    • Statement of Retained Earnings Example
    • Equity Ratio
    • Long Term Liabilities Example
    • Defensive Interval Ratio
    • Operating Expense Example
    • Solvency Ratio
    • Capital Adequacy Ratio
    • Cash Flow From Operations Ratio
    • Working Capital Example
    • Cash Reserve Ratio
    • Quick Ratio
    • Loan Sharks
    • Fixed Asset Examples
    • Partnership Example
    • Standard Deviation Examples
    • Accounting vs CPA
    • Period Cost vs Product Cost
    • Cash Ratio
    • Investment vs Speculation
    • Annuity vs Lump Sum
    • Bank Draft vs Certified Cheque
    • Bidding vs Auction
    • Better in Business and Finance
    • Direct Tax vs Indirect Tax
    • Financial Ratio Analysis Technique
    • Private equity vs Venture capital
    • EPS and Diluted EPS
    • Stocks vs Bonds
    • IFRS Vs US GAAP
    • Finance Degree Career Options
    • Dividends vs Capital Gains
    • Tax Slabs & Rates
    • Lease vs Buy
    • Interest Rate vs Annual Percentage Rate
    • Long Term vs Short Term Capital Gains
    • Memorandum of Association vs Article of Association
    • Large Cap vs Small Cap
    • CPA vs CMA
    • Assets vs Liabilities
    • Revenue vs Income
    • Bookkeeping vs Accounting
    • Financial Lease vs Operating Lease
    • EBIT vs EBITDA
    • Revenue vs Sales
    • Common stock vs Preferred stock
    • US GAAP vs IFRS
    • Current Account vs Capital Account
    • IFRS in India
    • Finance vs Economics
    • ACCA vs CIMA
    • Current Assets vs Non Current Assets
    • Economic Examples
    • Investment vs savings
    • Active vs Passive Investing
    • Financial Accounting vs Management Accounting
    • Revenue vs Earnings
    • Trade Discount vs Cash Discount
    • Limited Liability Company
    • Finance for Non Finance Professionals
    • Costs vs Expenses
    • Chapter 11 vs Chapter 13
    • Why Financial Analytics
    • Accounting vs Financial Management
    • ACA vs ACCA
    • ACCA vs CPA
    • Budget vs Forecast
    • Positive Economics vs Normative Economics
    • CA vs ACCA
    • Stakeholders Example
    • Stock vs Options
    • Liquidity vs Solvency
    • Stock vs Equities
    • Franchising vs Licensing
    • GDP vs GNP
    • Inflation vs Deflation
    • Economic Growth vs Economic Development
    • Direct cost vs Indirect Cost
    • Accrual Accounting vs Cash Accounting
    • FCFF vs FCFE
    • Public vs Private Accounting
    • Capex vs Opex
    • BSE vs NSE
    • Loans vs Advances
    • Discount Rate vs Interest Rate
    • ROIC vs ROCE
    • Percentage Of Completion Method
    • 10K vs 10Q
    • Shares Outstanding vs Float
    • Contribution Margin vs Gross Margin
    • Short Term vs Long Term Capital Gains
    • General Journal vs General Ledger
    • Outsourcing vs Offshoring
    • Depreciation vs Amortization
    • Liability vs Debt
    • Asset Purchase vs Stock Purchase
    • Accrual vs Provision
    • Actuary vs Accountant
    • Stock vs Inventory
    • Liability vs Expense
    • Dividends EX-Date vs Record Date
    • Bid Price vs Ask Price
    • Dividend vs Growth
    • Time vs Money
    • IRA vs 401 (k)
    • Corporation vs LLC
    • CEO vs President
    • Margin vs Markup
    • Leasehold vs Freehold
    • Lending vs Borrowing
    • Non-Profit vs Not For Profit
    • Corporation vs Incorporation
    • CFO vs CEO
    • Purchase vs Procurement
    • Deficit vs Debt
    • Internal Audit Vs External Audit
    • C Corp vs S Corp
    • Absolute Advantage vs Comparative Advantage
    • Tangible vs Intangible
    • Executive Director vs Managing Director
    • Company vs Firm
    • Insurance vs Assurance
    • Expense vs Expenditure
    • Hard Money vs Soft Money
    • Entrepreneurship vs Management
    • Loan vs Mortgage
    • Fair Value vs Market Value
    • Chief Executive Officer vs Managing Director
    • Manufacturing vs Production
    • Random Error vs Systematic Error
    • 401(K) vs Roth IRA
    • 403(b) vs 457
    • Adjusting Entries
    • Equity vs Commodity
    • Turnover vs Profit
    • Effective Interest Rate
    • Working Capital Ratio
    • Margin vs Profit
    • Loan vs Lease
    • Shares vs Debentures
    • Equity vs Fixed Income
    • Market Equilibrium
    • Economics vs Business
    • Secured vs Unsecured Credit Card
    • Profitability vs Liquidity
    • Z score vs T score
    • Equity vs Asset
    • Geometric Mean vs Arithmetic Mean
    • Cost vs Price
    • Industry vs Sector
    • ShortSale vs Foreclosure
    • Revenue vs Profit
    • Real Interest Rate
    • Account Payable vs Accrued Expense
    • Day Trading vs Swing Trading
    • Indirect Costs
    • Graphs vs Charts
    • Issued Shares vs Outstanding Shares
    • Creditor vs Debtor
    • Annuity vs IRA
    • Pension vs Annuity
    • Debt Consolidation vs Bankruptcy
    • Equity vs Shares
    • Economic Utility
    • Average vs Weighted Average
    • Operating Profit vs Net Profit
    • Purpose of Income Statement
    • NASDAQ vs Dow Jones
    • Direct Method of Cash Flow Statement
    • Real GDP
    • Derivatives Example
    • Nominal GDP
    • Generally Accepted Accounting Principles
    • Cost of Sales vs Cost of Goods Sold
    • Historical Value vs Fair Value
    • General Ledger vs Trial Balance
    • Actual Cash Value vs Replacement Cost
    • Job Costing vs Process Costing
    • Standard Cost vs Actual Cost
    • 401k vs Annuity
    • FIFO vs LIFO
    • Bid Price vs Offer Price
    • Sole Proprietorship vs Partnership
    • Equity Shares vs Preference Shares
    • Debt vs Equity
    • Cost Accounting vs Financial Accounting
    • Coupon vs Yield
    • Career in Finance
    • Gross Salary vs Net Salary
    • Tax Credit vs Tax Deduction
    • Variance vs Standard Deviation
    • What is Disposable Income
    • Liabilities in Accounting
    • Chapter 7 vs Chapter 11
    • Budgeting Examples
    • Fixed Costs Example
    • Joint Venture Example
    • Quantitative Research Example
    • Bootstrapping Examples
    • Monopoly Examples
    • Monopolistic Competition Examples
    • Risk Assessment Example
    • Inflation Accounting
    • Defined Benefit Plan
    • Variable Costing Example
    • Acquisition Examples
    • Cognitive Dissonance Example
    • Opportunity Costs Examples
    • Globalization Example
    • Histogram Examples
    • Mean Example
    • Trial Balance Example
    • Command Economy Examples
    • Sunk Cost Examples
    • Compounding Example
    • Compound Interest Example
    • Profit vs Income
    • Joint Venture vs Partnership
    • Comparative Advantage Example
    • Bank Reconciliation Example
    • Competitive Advantage Example
    • Accrual vs Deferral
  • Asset Management Tutorial (36+)
  • Banking (34+)
  • Corporate Finance Basics (24+)
  • Credit Research Fundamentals (6+)
  • Economics (36+)
  • Finance Formula (307+)
  • Financial Modeling in Excel (10+)
  • Investment Banking Basics (30+)
  • Investment Banking Careers (30+)
  • Trading for dummies (39+)
  • valuation basics (23+)
Finance Blog Courses
  • Finance for Non Finance Managers Certification
  • Cost Accounting Course
  • US GAAP Course
Footer
About Us
  • Who is EDUCBA?
  • Sign Up
  •  
Free Courses
  • Free Finance Course Online
  • Free Online Course Accounting
  • Free Tutorials on QuickBooks
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course
  • Venture Capital Course
  • CFA Level 1 Course
  • CFA Level 2 Course
  • IFRS Course Training
  • Project Finance Course
  • Hedge Funds Course
Resources
  • Resources (A To Z)
  • Investment Banking Jobs Offer
  • Finance Formula
  • Valuation
  • Accounting Fundamentals
  • Corporate Finance Basics
  • Financial Modeling in excel
  • Credit Research Fundamentals
  • Asset Management Tutorial
  • Trading for dummies
Apps
  • iPhone & iPad
  • Android
Support
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions

© 2019 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA Login

Forgot Password?

Let’s Get Started
Please provide your Email ID
Email ID is incorrect

Cyber Week Offer - Accounting Course Bundle (39 Courses, includes IFRS & US GAAP) View More

Cyber Week Offer - Cyber Week Offer - Accounting Course Bundle (39 Courses, includes IFRS & US GAAP) View More