What Is Financial Data Analysis?

The primary goal of financial data analysis is to maximize the wealth of the shareholders and the overall profitability of the company. Financial managers maximize the wealth of the shareholders by applying such concepts as credit and inventory management.

How Earnings are Valued

Income statements measure profitability. The price-earnings ratio indicates the relative value of earnings. The balance sheet shows assets and the financing of those assets with debt and equity.

Profitability Ratios

High revenues alone do not translate into revenue for investors. A company must be able to make a profit after clearing bills and expenses. Profitability ratios explain how likely it is that the company will make a profit.

Liquidity Ratios

Liquidity measures how quickly a company's assets can transfer into cash. This is important for a company to be able to purchase additional assets or repay creditors.

Solvency Ratios

Solvency ratios show how prepared a company is to deal with long term obligations and develop future assets. A company weighed down by debt is not attractive to investors.

Valuation Ratios

A valuation ratio shows a company's overall attractiveness to investors comparing the company's stock price to the earnings it will generate on a per-share basis. Valuation ratios are the expectations of future earnings of the company.

Resources

• A Guide to Financial Data Analysis by Carol Alexander