In order to perform a sound financial analysis, the understanding of financial reports and awareness of particular areas that require restatements in order to provide accurate information, becomes crucial.
The following are some additional analytical processes in widespread use:
Direct measurements (relationship between debt and equity);
Just as it is vitally important that the lending banker ensures that the business has the right total amount of finance needed to keep the business going, has repayment capacity for that finance, and has given us adequate security, it is equally important for the banker to ensure that the business has the mix of [...]
In this training module up to now, our main focus has been on how we might establish if our customer has repayment capacity for any existing or proposed loans.
The banker’s primary interest in analysing financial statements is to establish the level of risk attaching to existing or proposed borrowings, but more particularly, to estimate if repayment capacity exists at present and is likely to exist throughout the period of the borrowings.
There are an extremely large number of ratios which can be calculated from any given set of financial statements. However, the lending banker will primarily be concerned with those ratios which give an indication of the stability of the business and its ability to generate repayment capacity.
Introduction to Ratio Analysis
The principal method used to interpret financial accounts is Ratio Analysis, which is simply a means of highlighting, in arithmetic terms, the relationship between two figures in the accounts.
Basic to analyst’s work is the ability to reconstruct the business transactions that are summarized in the financial statements. One can visualize this important skill as the ability to replicate the accountant’s work but in reverse order. The flow of analyst’s work:
The process of Financial Statement Analysis consists of the application of analytical tools and techniques to financial statements and data in order to derive from them measurements and relationships that are significant and useful for decision making. Thus financial statement analysis first and foremost serves the essential function of converting data into useful information, which [...]
