Tools of Financial Analysis: Trend Percentages
Also known as the Pyramid Method. Studying the operational results and financial position over a series of years is trend analysis. Calculations of ratios of different items for various periods is done & then compared under this analysis. Whether the enterprise is trending upward or backward, the analysis of the ratios over a period of years is done. By observing this analysis, the sign of good or poor management is detected.
Quantitative analysis of information contained in a company’s financial statements is ratio analysis. It describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm.
To assess the profitability, solvency, and efficiency of a business, management can go through the technique of ratio analysis. It is an attempt at developing a meaningful relationship between individual items (or group of items) in the balance sheet or profit and loss account.
Cash Flow Analysis
The actual movement of cash into and out of a business is cash flow analysis. The flow of cash into the business is called the cash inflow. Similarly, the flow of cash out of the firm is called cash outflow. The difference between the inflow and outflow of cash is the net cash flow.
Cash flow statement is prepared to project the manner in which the cash has been received and has been utilized during an accounting year. It is an important analytical tool. Analysis of cash flow explains the reason for a change in cash. It helps in assessing the liquidity of the enterprise and in evaluating the operating, investment & financing decisions.