Summary Topic: Financial Analysis

600 Words3 Pages
Concerning financial analysis of a company there are four major categories to look at. These categories are sustainable income, comparative analysis, ratio analysis, and quality of earnings. In this easy I will be discussing two of the four, sustainable income, and comparative analysis. These two are very important to analyst as they give a snap shot of the future earnings. Sustainable Income One important estimate a company can make is to estimate its future cash flow. This gives the business a tool to make financial decisions. To estimate future cash flow analyst will use sustainable income. Sustainable income is the net income that has been adjusted for irregular items. This differs from net income as it is calculated after…show more content…
Comparative Analysis Not only are investors interested in sustainable earnings but also they are looking at comparing earnings from each period. To help compare financial information there are three types of comparisons used; intracompany basis, intercompany basis, and industry averages. If a business wants to detect trends and changes they will use the intracompany basis. If the same business wants to compare its performance against another business in the same industry they will use the intercompany basis. Also a business can use industry basis to compare its position within the same industry. There are three basic tools used to show the pertinent date of financial statements; horizontal analysis and vertical analysis. Horizontal analysis is commonly known as trend analysis. This is the tool used to analyze financial data over a certain period. This is used to see whether there is a decrease or increase in sales. Then there is vertical analysis. Vertical analysis is the tool that will show each item on the balance sheet as a percentage of the total account. This helps to compare businesses of different sizes (Kimmel, Weygandt, Kieso, 2010). Conclusion The quality of earnings is the most important aspect for analyst when reviewing a business’s financial statements. This import also for managers, employees, and investors as the financial statements of a
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