Tuesday, December 20, 2016

How Can I Analyse the Financials of a Company?

Picture depicts the concept of financial analysis
Picture depicts the concept of financial analysis
Dear Friend!

Thank you very much for the thought-provoking question. But the answer is very difficult as financial analysis is a vast subject.

Still I will try my best to answer your question.
The financial statements form the basis of financial analysis of a company and there are three key financial statements as follows:
1.     Balance Sheet
3.     Cash Flow Statement

The balance sheet or the statement of affairs lists the assets and liabilities. From the balance sheet we can derive the strength of the company to meet its liabilities and obligations through three short-term liquidity and long-term solvency ratios as follows:
1.     Current Ratio
2.     Debt-Equity Ratio

The profit and loss account explains how the changes in the balance sheet between two dates have taken place. It throws light on the profitability of the operations of the company. Following are the key profitability ratios that can be derived from the study of the profit and loss account:
1.     EBDITA
2.     EBT
3.     PAT

The cash flow statement is a very important but often neglected financial statement. Cash generated from the operations after meeting the increase in inventory, receivable and other current assets, called free cash flows is especially important. Many companies show consistent profits but those profits are not sufficient to meet the working capital requirements and are forced to borrow which in turn erodes future profitability and the company is trapped in a vicious cycle negative operating cash flows and borrowing to bridge the gap.

Suggested Further Reading:

On this blog a number of articles and financial analysis reports of Indian companies listed on the stock exchanges are available:

I suggest you study a few and you will get practical experience.
Thank you,
With Warm Regards