Financial analysis can be used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. Here are a few types of financial analysis that might be applicable to a business, a private enterprise, and a public company...
1. **Business (Small to Medium-Sized Enterprises)**
- **Vertical Analysis**: Also known as common-size analysis, this analysis allows the business to see each item on their income statement as a percentage of sales. It allows small business owners to better understand their expenses in relation to their revenues.
- **Horizontal Analysis**: This involves the comparison of historical financial data over a series of reporting periods, or of the ratios derived from this financial data.
- **Ratio Analysis**: This analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.
- **Cash Flow Analysis**: It assesses the business's liquidity and solvency by looking at the inflows and outflows of cash during a certain period.
2. **Private Enterprise (Larger-Scale Corporations)**
- **Break-Even Analysis**: Often used by private enterprises to determine the level of sales needed to cover the company's total fixed costs.
- **Investment Valuation/Projection Analysis**: This is used to forecast the company's economic prospects and potential profits.
- **Cost-Benefit Analysis**: This type of analysis is useful in decision-making processes, as it allows the company to weigh the costs of a project against the benefits it would provide.
- **Risk Analysis**: Private enterprises often use this type of analysis to identify and manage potential problems that could undermine key business initiatives or projects.
3. **Public Company**
- **Earnings Analysis**: This focuses on earnings to understand the profitability of the company. This can be done by analyzing Earnings per Share (EPS) or Price/Earnings (P/E) ratio.
- **Market Position Analysis**: It evaluates the company's competitive position in the market.
- **Shareholder Equity Analysis**: This is used to analyze the company's financial structure and the capacity to meet long-term obligations.
- **Credit Analysis**: Often used by investors and lenders to assess the creditworthiness of the company.
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