For the takeover of a company, for example, financial analysis is crucial because it is used to determine whether the company in question can make a profit or whether it generates losses instead. So thanks to the financial analysis of a company, one also has the possibility to have a very good visibility on its real situation from several stages.
Turnover and market analysis
First of all, the financial analysis begins with a detailed study of the company’s turnover structure and margins. This will allow learning more about the company’s revenue lines and its position in relation to its competitors in the market. So it loses market share for example if the turnover is +13% between 2 accounting years and the market is +20% at the same time. In order to better analyse the evolution of expenses in relation to the evolution of its turnover, a technique can be adopted which consists of taking into account any cost line as a percentage of turnover and then studying its progression over several fiscal years. If the value of an expense increases over time, further analysis is required on this particular point.
Investment analysis and financing
A detailed study of the investment and financing is necessary to determine whether the business is generating a positive operating result and, if so, whether or not it is far from break-even. This is an important phase in the financial analysis of a business. The strategy to be adopted would be to bring the amount of new investments into line with the depreciation charges for fixed assets on the assets side of the balance sheet. If a company invests in a machine costing €45,000 for example and plans to use the machine for 3 years, it will have to depreciate €15,000 in its income statement for each year. And for the analysis of the financing, it is necessary to understand its cash flow. To achieve this, a calculation of the company’s cash flow or self-financing capacity is essential. This makes it possible to know at a glance the company’s cash flow variation over the period. In general, it should be taken into account that a company grants payment terms to its customers, owns stocks and also pays its suppliers on credit. Although technically cash flow offers potential for profitability, the reality is quite different.
Finally, key profitability ratios, such as return on assets, can be derived from the financial analysis in order to allow comparisons with other companies in the same industry and to highlight the efficiency of the company. Return on equity, net margin, turnover of capital employed and debt leverage should be considered.