BASIC FINANCIAL ANALYSIS

How To Analyze Your Business Using Financial Ratios
The goal   is”

1. to look at how your company is doing compared to earlier periods of time, and

2. how is the  performance of your company compares to other companies in your industry. 

A ratio, is the relationship between two numbers. If the stock is selling for N60 per share, and the company's earnings are N2 per share, the ratio of price (N60) to earnings (N2) is 30 to 1. In common usage, we would say the "P/E ratio is 30. This  ratio can be expressed in several ways as:
30:1          30-to-1          30/1

There are basic steps you may use when evaluating company cases.  But before you start, you must understand a couple of things :

1.Financial indicators vary from industry to industry;

2.Financial indicators can only be interpreted when compared and contrasted with other companies in that industry.  

Step 1.  Acquire the company’s financial statements for several years.

Step 2.  Quickly scan all of the statements to look for large movements in specific items from one year to the next.

Step 3.  Review the notes accompanying the financial statements for additional  information that may be significant to your analysis. 

Step 4.  Examine the balance sheet.  Look for large changes in the overall components of the company's assets, liabilities or equity. 

Step 5.  Examine the income statement.  Look for trends over time.

Step 6.  Examine the shareholder's equity statement.  Has the company issued new shares, or bought some back?  Has the retained earnings account been growing or shrinking? 

Step 7.  Examine the cash flow statement

Step 8.  Calculate financial ratios

Step 9.  Obtain data for the company’s key competitors

Step 10.  Review the market data you have about the company’s stock price, and the price to earnings (P/E) ratio.

Step 11.  Review the dividend payout. 

Step 12.  Review all of the data that you have generated. 

The most frequently used ratios by Financial Analysts that provide insights into a firm's strength or weakness:

• Common size ratios

• Liquidity

• Degree of financial leverage or   Debt

• Profitability

• Efficiency

• Value