Decoding Financial Research and Analysis

Financial research and analysis involve examining businesses, projects, budgets, and other financial transactions to assess their performance and suitability. The purpose of financial research and analysis is to determine if an entity is financially stable, solvent, liquid, or profitable enough to justify an investment of money.

Uses of Financial Research and Analysis

Security Analysis

Security analysis involves determining the precise value of these securities for the corporation and the costs associated with raising funds through them. 

Credit Analysis

Credit analysis is utilized by an organization’s lenders to assess the level of risk associated with lending money. The purpose of credit analysis is to determine whether the firm will be able to repay its debts or become insolvent shortly.

Debt Analysis

Debt analysis involves determining the percentage of debt on the assets owned by an organization. Its purpose is to assess whether the assets owned are enough to repay the debt. 

Importance of Financial Research and Analysis

Assessing the Financial Performance and Position

By comparing statements of profit and loss for the current year and previous years, revenues and expenses can be evaluated to determine the percentage shift between them. Financial research services provide insight into financial performance over time.

Operational Efficiency

Financial analysis involves using ratio analysis and other techniques to examine a business’s financial statements and draw conclusions. Activity ratios, working capital turnover ratios, operating ratios, and operating profit ratios, are useful in assessing the operational efficiency of the business.

Indicating Growth Trends

Comparative statements of profit and loss and balance sheets are used to display the percentage changes in the data recorded in those statements. This assists financial statement users in assessing the organization’s growth or losses over time.

Trend Forecasting

It involves selecting a single year as the base year and expressing the results for the subsequent years as a percentage of the base year. This analysis helps to identify problems and inefficiencies, as well as assess the company’s operational effectiveness and financial status.

Facilitates Comparison

Financial research and analysis have a significant benefit in enabling comparisons both between and within firms. The inter-firm comparison involves assessing the competitive position of two or more similar business units to enhance performance, productivity, and profitability. The intra-firm comparison involves comparing different units or products within the same business to conduct a competitive and meaningful analysis aimed at improving the efficiency of all departments within the company.

Provides Information to Stakeholders

Simply recording figures in financial statements do not provide useful information until they are compared to figures from other periods and analyzed and interpreted to communicate the results to users. Investment research services assist in studying and scrutinizing the figures so that the results become comprehensible and comparable.

Limitations of Financial Research and Analysis

Financial analysis is constrained by the constraints of financial statements because it depends solely on the information contained there. 

  • Financial analysis is based on the historical cost idea of accounting, it ignores changes in price levels.
  • As financial statements only capture the quantitative components of the transactions, qualitative factors, such as the potential of the workforce and management, are ignored.
  • Personal bias, opinions, and prejudices of the accountant are frequently present in financial accounts. As a result, the conclusions drawn from the examination of such biased remarks are unfair.

Summing up

Financial analysis techniques may involve examining changes in financial statements, computing financial ratios, or analyzing operating discrepancies. Analysts, whether they specialize in corporate, investment, or technical analysis, use financial data to identify patterns, comprehend growth, detect areas of risk, and guide decision-making. They help entrepreneurs and investors in making informed and strategic decisions based on a company’s financial data.