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What is financial analysis and why is it important?

Financial Analysis is the study of financial statements and ratios which can help you better understand a company’s financial condition and future prospects. The goal of financial analysis is to use this information to make better, more informed decisions as an investor or as an executive. There are numerous metrics that can be used for financial analysis, such as common stock price ratios like Price Per Share (P/S), Price / Book (P/B), Price / Cash Flow (P/CF), etc… But there are also more advanced metrics such as Return on Equity (ROE). These statistical indicators give insight into how well a company is managing its finances and provide a framework for making investment decisions.

Key Tools in Financial Analysis

Beyond numerous calculations in financial analysis, as an investor, you need to be able to recognize the value in the numbers and have an understanding of how to use them. The first thing you want to do as an investor is to look at the first and most important financial statement: the income statement. This is the first thing that investors look at because it shows how much money a company made and what its expenses were. The income statement also shows how much cash the company had on hand before any expenses were taken out. An income statement will look something like this:

The Income Statement (I/S) is a numerical summary of the information contained within the Balance Sheet (B/S). It breaks down all of a company’s revenues, costs, operating expenses, and operating cash flow into an easy-to-read format. The income statement can be used to answer the following questions:

By adding revenues and subtracting expenses, you can calculate earnings before interest and taxes (EBIT). This will be an important number to look at if you are buying shares of a company that has debt. If the EBIT is greater than the interest expense, then you will see that portion of the operating cash flow applied to paying down their debt rather than being used for other expenses.

Another way to calculate earnings before interest and taxes is by subtracting interest paid from EBIT. This number will give you a better picture of how much money was available for operational expenditures (the company’s day-to-day activities) rather than paying off their debts.

The income statement can be used to evaluate whether a company’s earnings are growing or shrinking over time. This goes by the name of “Trend Analysis” and is often referred to as the CAGR for Compound Annual Growth Rate. The formula to calculate a CAGR is:

Net Income – Cash Flow = Free Cash Flow (FCF)
Free Cash Flow – CapEx = Net Capital Expenditures (CapEx)
Net Capital Expenditures – Debt Repayment = Free Cash Flow Available for Dividends and Loan Repayments / Capital Spending

The book value of a company can be calculated from its balance sheet. The book value is the difference between the current assets and liabilities. This will give you a better idea of what your potential return on your investment will be if you were to liquidate all of the assets at their value.

The other thing that you need to look at are the balance sheet ratios. These are ratios that compare two different assets, such as debt to equity, revenue to expenses, etc… The ratio should be considered in context with each other because it only tells half the story. The important part of these ratios is to take them together with what you know about a company’s profitability and growth prospects to see how well they will perform over time. There are also some other ratios that could be used as an investment, such as Return on Equity (ROE) and Earnings per Share (EPS).

Benefits of Proper Financial Analysis

Being able to carry out adequate financial analysis will help you make better choices when investing. It will also help you better understand what impact your purchases have on the economy as well as your future quality of life when comparing competing products and services available in today’s marketplace.

Analyzing companies’ financial statements is a vital part financial analysis. It is important because:

  1. The company’s financial strength and potential for continued improvement and growth
  2. The company’s profitability and ability to continue earning profits over time
  3. The possible rate of price appreciation of the company’s stock over time, particularly its stock price performance relative to other stocks in the same industry or sector, or vs. more or less speculative stocks with less dependable earnings records, etc.
  4. Potential for future changes in income tax rates, legislation regarding business taxation, possible new laws regarding taxation of any activity by the company, etc.
  5. The company’s ability to raise its prices, increase the profitability of product lines, and grow its net income and earnings per share over time
  6. Market psychology regarding the prospects for growth in a related industry, sector or economy that may influence a company’s prospects for future growth and prosperity
  7. From the business owner/executive perspective, you will be able to use these metrics to track a company’s progress and make decisions on how the company should proceed. Financial ratios such as profit margin, debt to equity, and return on assets (ROA) can all be used in determining resource allocation and restructuring plans if needed.

Hire related Fintalents

Hire the best Financial Analysis specialists in 2,900+ industries

Fintalent is the invite-only community for top-tier M&A consultants and Strategy talent. Hire global Financial Analysis consultants with extensive experience in over 2,900 industries. Our platform allows you to build your team of independent Financial Analysis specialists in 48 hours. Welcome to the future of Mergers & Acquisitions!

Why should you hire Financial Analysis experts with Fintalent?

Trusted Network

Every Fintalent is exclusively invited and vetted.

Ready in 48h​​​

Hire efficiently. Your M&A team is ready in 2 days or less.​​​​

Specialized Skills​

Fintalents are best-in-class - and specialized in 2,900+ industries.​

Code of Ethics​​

We guarantee highest integrity and ethical principles.​​​

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Frequently asked questions

Most frequent questions and answers

What clients usually engage your Financial Analysis Consultants?

We work with clients from all over the world. Our clients range from enterprise and corporate clients to companies that are backed by Private Equity or Venture Capital funds. Furthermore, we work directly with Family Offices, Private Equity firms, and Asset Managers. Most of our enterprise clients have dedicated Corporate Development, M&A, and Strategy divisions which are utilizing our pool of Financial Analysis talent to add on-demand and flexible resources, expertise, or staff to their in-house team.

How is Fintalent different?

Fintalent is not a staffing agency. We are a community of best-in-class Financial Analysis professionals, highly specialized within their domains. We have streamlined the process of engaging the best Financial Analysis talent and are able to provide clients with Financial Analysis professionals within 48 hours of first engaging them. We believe that our platform provides more value for Corporates, Ventures, Private Equity and Venture Capital firms, and Family Offices.

Our Hiring Process – What do ‘Community-Approach’ and ‘Invite-to-Apply’ mean?

‘Invite-to-Apply’ is the process by which we shortlist candidates for the majority of projects on our platform. Often, due to the confidential nature of our clients’ projects, we do not release projects to our whole platform but using the matching technology and expertise of our internal team we select candidates who are the best fit for our clients’ needs. This approach also ensures engagement with our community of professionals on the Fintalent platform, and is a benefit both to our clients and independent professionals, as our freelancers have direct access to the roles best suited to their skills and are more likely to take an interest in a project if they have been sought out directly. In addition, if a member of our community is unavailable for a project but knows someone whose skill set perfectly fits the brief, they are able to invite them to apply for the role, utilizing the personal networks of each talent on our platform.

Which skills and expertise do your Fintalents have?

The Fintalents are hand-picked and vetted Financial Analysis professionals, speak over 55 languages, and have professional experience in all geographical markets. Our Financial Analysis consultants’ experience ranges from 3+ years as analysts at top investment banks and Strategy consultancies, to later career C-level executives. The average working experience is 6.9 years and 80% of all Fintalents range from 3-12 years into their careers.

Our Financial Analysis consultants have experience in leading firms as well as interfacing with clients and wider corporate structures and management. What makes our Financial Analysis talent pool stand out is the fact that they have technical backgrounds in over 2,900 industries.

How does the screening and onboarding of your Financial Analysis talent work?

Fintalent.io is an invite-only platform and we believe in the power of referrals and a closed-loop community. Members of our community are able to invite a small number of professionals onto the platform. In addition, our team actively scouts for the best talent who have experience in investment banking or have worked at a global top management consultancy. All of our community-referred talent and scouted talent are subject to a rigorous screening process. As such, over the last 18 months totaling more than 750 hours of onboarding calls, of which only 40% have received an invite-link after the call.

What happens if I am not satisfied with my Financial Analysis consultant’s work?

During your initial engagement with a member of our Fintalent talent pool with no risk. If you are not satisfied with the quality of your hire for any reason then we are able to find a replacement at short notice. There is no minimum commitment per project, but generally projects last at least 5 days and can last 12+ months.

Interested in our invite-only community of tier-1 Financial Analysis experts?

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