A Complete Guide to the Main Types of Financial Analysis

Profitability Analysis is essentially a mechanism to determine how efficiently the company is in addressing the demand requirement of its customers as well as in terms of competition.

1. Gross Profit Margin: it tells you how much the firm has at your disposal for making money after subtracting the cost of making the product.

2. Operating Profit Margin: Operating Profit/Revenue-This is the profit of core business operations without interest and tax

3. Net Profit Margin: Net Income/Revenue-This is the overall profitability: all expenses and tax are put into account

This may result as an indication in relation to the likelihood of the company to pay for the expense and then to sustain growth. This would become one of the opportunities to compare the efficiency with industry peers as well as against the historical performance

Liquidation means servicing the liabilities of a firm short term. Still, a firm is said to be on a healthy position with regard to its liquidity if it can liquidate its liabilities without selling off the assets or sourcing for funds from the external market.

1. Current Ratio: = Current Assets / Current Liabilities – These measures test the company's ability to clear short term debts.

2. Quick Ratio: = (Current Assets - Inventory / Current Liabilities) – This is like the above current ratio except here, the inventory is not counted and it is much more focusing on the most liquid assets.

3. Cash Ratio: (Cash and Cash Equivalents / Current Liabilities) – This ratio will present a far more extreme view of the liquidity as it is focusing on cash reserve.

Then, liquidity would be something of great importance in knowing whether the company has cash flow enough to continue its business operations and avoid problems of solvency. This may be quite important to business sectors that have income periodically-a.k.a. seasonal income-or also businesses with very high operating costs.

It would reveal the long-run solvency position of the firm to be able to meet any obligations that are coming in the long run. Such an analysis further would reveal how much dependent the firm is upon debt or not, and whether the firm performs the same better or not.

1. Debt-to-Equity Ratio: = Total Debt / Total Equity – It depicts the proportion of funding through debt versus equity of shareholders.

2. Interest Coverage Ratio: (Operating Income / Interest Expense)-How easy it is for the company to pay interest on outstanding debt./p>

3. Debt Ratio: (Total Debt / Total Assets)-it measures how much of a firm's assets are financed with debt.

With the awareness of above ratios of solvency, investors and the management will make an assessment whether the capital structure of a company is sustainable and how it would adversely be affected in case the economy deteriorates or for that matter any change in the market.

Efficiency, or activity analysis, shows how effectively a firm is generating income from its assets. It gives one an idea of the working and resourcing of the firm.

1. Asset Turnover Ratio: Revenue / Total Assets – It explains how well assets are working for generating sales.

2. Inventory turnover ratio: Inventory turnover ratio= Cost of goods sold/Average Inventory It explains how frequently the sold inventory is replaced during a period.

3. Receivables Turnover Ratio: Net Credit Sales / Average Accounts Receivable – Measures how effectively a firm collects payments received from credit sales.

Thus, from the analysis, there has been realization that bottlenecks operationally benefit in improving the capability of using a resource in the right direction. Therefore, that would help management increase levels of productivity at the operational levels and, indirectly, profitability levels.