A Company Financial Analysis in Just 12 Steps

It’s important to perform a company financial analysis in order to see how the company is performing compared to earlier periods of time and how the company’s performance stands up against other competitors in its industry.

“Financial Analysis is something of an art,” said Philadelphia University assistant professor of management, Harvey B. Lermack.

While performing a company financial analysis can be involved, these steps will provide a basic foundation for you to get started.

Experienced managers, investors, and analysts collect industry information over time that allow them to perform financial analysis of companies more thoroughly and more swiftly.

But, for our purposes we will discuss the basic steps for you to start dabbling in the art of financial analysis.

Step 1. Collect the company’s financial statements from the last three to five years including:

  • Balance Sheets
  • Cash Flow Statements
  • Income Statements
  • Shareholders equity statements

These financial reports can be found in a recent annual report, in the company’s 10K filing, or on the U.S. Securities and Exchange Commission EDGAR database.

  person reviewing financial numbers for businessStep 2. Analyze these financial statements and scan them in order to look for large movements in specific items from one year to the next.

Lermack poses this example, “Did revenues have a big jump, or a big fall, from one particular year to the next?  Did total or fixed assets grow or fall?”

Also, look for suspicious activity. If anything jumps out at you, research what you know about the business to find out why an item is suspicious-looking. For instance, did the company sell off some of its operations during the period of time you’re analyzing?

Step 3. Make sure to review the financial statement’s notes. These notes may have information that could be important in your analysis of the business.

Step 4. Analyze the Balance Sheet to see if there are large changes in the company’s assets, liabilities, or equity.

Step 5. Examine the Income Statement to identify trends over time.

Step 6. Next, evaluate the business’s Shareholder’s Equity Statement. Lermack recommends asking, “Has the company issued new shares, or bought some back? Has the retained earnings account been growing or shrinking?”

Step 7. Analyze the company’s Cash Flow Statement.

Step 8. Calculate financial ratios. Learn the top five financial ratios and how to calculate them.

Step 9. Then, gather the company’s key competitor’s data.people viewing financial analysis graphs

Step 10. Review the market data of the business’s stock price, as well as the Price to Earnings (P/E) Ratio.

Step 11.  Review the Dividend Payout. The Dividend Payout Ratio measures the percentage of a company’s net income given to shareholders in the form of dividends.

How to calculate the Dividend Payout Ratio: Total Annual Dividends Per Share / Diluted Earnings Per Share

Step 12. Now, you can evaluate all of the data YOU generated. Congratulations, you did it! You successfully performed a financial analysis on a business!

Keep in mind that there are other steps you can take along with these steps to get a deeper understanding of the meaning of the company’s numbers and how they impact performance and growth.

Learn how financial analysis can fuel you tactical execution for growth.