Financial analysis is the system of evaluating businesses, projects, budgets, and different finance-related transactions to determine their performance and suitability. It involves using financial data to check a company’s performance and make suggestions about how it can move forward.

Financial analysts will thoroughly examine the company’s financial statements: income statement, balance sheet, and cash flow statement. One of the most common methods of analyzing financial data is to calculate ratios based on financial statement data to compare it with data from other companies or with the historical performance of the company itself.

Financial analysis is one of the key tools that business managers need to verify the performance of their organization. For this reason, they constantly ask financial analysts about the profitability, cash flow, debt and other financial aspects of their business.

Types of Financial analysis

1: Vertical Analysis:

This type of financial analysis involves looking at the various components of the income statement and dividing them by income to express them as percentages. For this to be most effective, the results should be compared to other companies in the same industry to understand how that company is performing.

2: Horizontal Analysis:

Horizontal analysis retrieves several years of financial data and compares them to each other to determine growth rates. This helps analysts determine whether a company is growing or declining and identifies important trends.

3: Liquidity Analysis:

This is a type of financial analysis that focuses on the balance sheet, especially the ability to meet a company’s short-term obligations (maturity less than one year). Examples are; Current ratio, Cash Ratio

Other types of financial analysis are;

Solvency Analysis.

Profitability Analysis.

Scenario & Sensitivity Analysis.

Variance Analysis.

Who is a financial analyst?

Financial analysts have a look at monetary facts and use their findings to assist agencies make business choices. Although financial analysts face some challenges, they are also a career full of opportunities, especially when choosing an industry. This is because financial analysts play an essential role in almost every area of business, so whether you are passionate about music or interested in technology, you may find the right opportunity for you.

A mutual fund is a financial instrument that consists of a pool of funds raised from many investors and is used to invest in securities such as stocks, bonds, money market, and other assets. They are operated by fund managers who allocate the fund’s assets and seek to generate capital gains or income for investors.

They have specific advantages for direct investment. For example, you may miss skills to understand your market trends, or do not have time to follow the market. Mutual funds are an excellent alternative to be administered by experts in this case.

It can be managed by companies that must be registered with the SEC (Securities and Exchange Commission). When investing in a mutual fund, you buy the funds’ shares either on the fund itself or through a broker or other investment professional. Each stock shows the percentage of reservations for all investments in the fund portfolio.

Investing in mutual funds can make money in several ways. If the fund sells securities all year round and makes a profit (called capital gains) from the sale, the profit (excluding capital losses) can be distributed to shareholders at the end of the year. Alternatively, securities in the fund’s portfolio can be distributed to investors by paying dividends. Finally, as the market value of a portfolio of investment trusts rises, so does the value of stocks.

There are different types of funds but we will be talking about main 4

1: Fixed income funds They buy investments that pay fixed returns. This type of mutual fund mainly focuses on being able to bring profits to the fund through interest.

2: Balanced Funds A well-balanced fund invests in a mixture of equity and fixed income securities, typically at a ratio of 40% equity and 60% fixed income. The purpose of this fund is to generate higher returns while mitigating risk through fixed income securities. 3: Speciality funds: It focuses on special delegations such as real estate, commodities, or socially responsible investment. For example, Social Responsibility funds can invest in companies that support environmental management, human rights and diversity, and avoid liquor, tobacco, gambling, weapons and the military and affiliates.

3: Money market funds These funds invest in short-term fixed-income securities such as government bonds, treasury bills, bank acceptances, commercial paper, and certificates of deposit. They are generally a safer investment, but have lower potential returns than other types of mutual funds.

In conclusion, because mutual funds are diversified investments, they are less risky than buying individual securities. If one of the companies goes bankrupt, they own more stock to protect their investment. An actively managed fund offers the benefits of professional stock picking and portfolio management. No need to research thousands of companies.

Managers are experts in their respective fields. It is almost impossible to become an expert in every field you want to invest in. However, the investment trust’s investigation still takes considerable time. To make matters worse, the fund managers change. In this case, the performance of the fund may be affected even if the sector is strong. This is important because managers constantly change the stock they own. The prospectus may not reflect your current shareholding, so it relies on the expertise of the administrator.

Liquidation (LQ) is the process of ending a business and distributing its assets to the claimant. These types of incidents usually occur when the company is in a situation of insolvency, which means that it cannot pay its obligations when they are due.

Simply put, Liquidation is when a company can’t pay its debts when they fall due, or when it’s liabilities exceed its assets.

Voluntary liquidation is a type of LQ that occurs when creditors petition through the court to liquidate the company. Once the business enters the process, the business owner will have little control over the process. Voluntary creditor liquidation (CVL) can be used to avoid forced liquidation. In essence, corporate directors choose to voluntarily terminate the company and then liquidate all of its assets in an attempt to repay creditors.

Bankruptcy is a legal process that involves individuals or businesses who are unable to pay outstanding debts. Bankruptcy proceedings begin with an application filed by the debtor or on behalf of the creditor. All of the debtor’s assets have been measured and evaluated, and the assets can be used to repay part of the outstanding debt.

The two types of bankruptcy are voluntary bankruptcy and involuntary bankruptcy. Voluntary bankruptcy involves the voluntary declaration of bankruptcy by the people or companies involved. Involuntary bankruptcy involves your creditors taking you to court in an attempt to get back the money they loaned you. The court will evaluate your case and can then declare you bankrupt.

Key differences between Bankruptcy and Liquidation

1: Bankruptcy is a condition in which an individual is found to be unable to pay his debts. Liquidation is a process of distributing the assets of the business and closing the business permanently.

2: In Liquidation the company is permanently closed down while Bankruptcy lasts only three years.

3: While bankruptcy can give an individual a fresh start liquidation shuts down the business, so it cannot give businesses a chance to restart.

4: Bankruptcy stems from financial crisis or insolvency, but liquidation may be due to financial instability or other reasons.