Analysing Financial Performance

All businesses have financial goals and objectives. So how can businesses make sure that they achieve set financial goals? They have to analyse their financial performance. By analysing financial performance, organisations can gain a better understanding of how where they stand currently and can assess what they need to do to achieve their future goals.

What is the purpose of analysing financial statements?

Every company aims to increase its profitability and generate more income. Owing to financial statements, we are able to understand its business model and verify whether it’s making a profit or loss. We are able to see how the company is spending, investing and earning money. We can notice whether a company is growing, is stagnant or is collapsing. Knowing how the company is performing, we are able to make better economic decisions in the future.

Financial statement performance

Financial statement performance analysis is a process of analyzing a company’s financial position. It focuses on reviewing, assessing, and comparing financial statements - a collection of data and figures organised according to recognized accounting principles. It may also include calculating and analysing financial ratios.

There are two main financial statements: income statement and balance sheet.

Fig. 1 - Financial statements

How to analyse the financial performance of a company?

The Income Statement of company A for the year ended 31.12.2019 would look as follows:

Important points arising out of the above:

• The full cost of fixtures and fittings does not appear because it is a capital expenditure. Instead, the depreciation represents this years’ revenue expenditure.

• The money which the owner withdrew from the business does not appear because it represents a reduction in the capital, rather than an expense.

Financial performance analysis example

Let’s have a look at the balance sheet of a company B:

Important points arising out of the above:

• Assets and liabilities can be short term and long term (current and non-current).

• Net current assets are current assets minus current liabilities.

• Net assets are total assets minus total liabilities.

• Intangible non-current assets might be for example IPR, goodwill licences.

• Tangible non-current assets might be for example equipment, plants, buildings.

• Receivables is money owed to the company by credit customers.

• Payables denote money owed by the company to credit suppliers.

• Net assets equal total equity.

• Liabilities are being deducted from the assets.

Income Statement vs. Balance Sheet

Both income statements and balance sheets are used by company owners, banks and investors, because they provide a good indication of the current and future financial position of a company. However, there are some key differences regarding the statements (see the table below).

Financial Performance ratio and report analysis

We have written a separate article “Financial Ratios” introducing you to financial ratios and methods of calculating them. However, there are the most important ratios to analyze the financial performance:

• Return on capital employed,

• Net profit margin,

• Gross profit margin,

• Current ratio.

Fig. 2 - Financial performance ratios

Financial Report

How to make a financial report?

1. Gather information from financial statements.

2. Calculate ratios.

3. Conduct a risk assessment.

4. Determine the value of a company.

Fig. 3 - How to make a financial report?

Sections of the financial report

1. Company overview - description of the business.

2. Investment - advantages and disadvantages of investing in the business.

3. Valuation - a value of the business.

4. Risk Analysis - factors that might prevent the business from growing.

5. Details - financial statements and ratios.

6. Summary - a brief recapitulation of all the sections.