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Financial Statement Analysis
How It Works

Types of Financial Statements

Financial performance.

Financial Statement Analysis FAQs
Corporate Finance
Financial statements: Balance, income, cash flow, and equity

Financial Statement Analysis: How It’s Done, by Statement Type

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

Key Takeaways

Financial statement analysis is used by internal and external stakeholders to evaluate business performance and value.
Financial accounting calls for all companies to create a balance sheet, income statement, and cash flow statement, which form the basis for financial statement analysis.
Horizontal, vertical, and ratio analysis are three techniques that analysts use when analyzing financial statements.

Jiaqi Zhou / Investopedia

How to Analyze Financial Statements

The financial statements of a company record important financial data on every aspect of a business’s activities. As such, they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United States. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP, which requires accrual accounting. Private companies have greater flexibility in their financial statement preparation and have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis , vertical analysis , and ratio analysis . Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets , liabilities , and shareholder equity . Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit . It then moves to operating profit , which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the net income is reached.

Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.

Free Cash Flow and Other Valuation Statements

Companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company . Free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may keep a valuation statement as they progress toward potentially going public.

Financial statements are maintained by companies daily and used internally for business management. In general, both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall financial performance .

When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results. Finally, ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively.

Below is a breakdown of some of the most common ratio metrics:

Balance sheet : This includes asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
Income statement : This includes gross profit margin, operating profit margin, net profit margin, tax ratio efficiency, and interest coverage.
Cash flow : This includes cash and earnings before interest, taxes, depreciation, and amortization (EBITDA) . These metrics may be shown on a per-share basis.
Comprehensive : This includes return on assets (ROA) and return on equity (ROE) , along with DuPont analysis .

What are the advantages of financial statement analysis?

The main point of financial statement analysis is to evaluate a company’s performance or value through a company’s balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical, or ratio analysis, investors may develop a more nuanced picture of a company’s financial profile.

What are the different types of financial statement analysis?

Most often, analysts will use three main techniques for analyzing a company’s financial statements.

First, horizontal analysis involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods.

Second, vertical analysis compares items on a financial statement in relation to each other. For instance, an expense item could be expressed as a percentage of company sales.

Finally, ratio analysis, a central part of fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.

What is an example of financial statement analysis?

An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it generates profits and shareholder value. For instance, gross profit margin will show the difference between revenues and the cost of goods sold. If the company has a higher gross profit margin than its competitors, this may indicate a positive sign for the company. At the same time, the analyst may observe that the gross profit margin has been increasing over nine fiscal periods, applying a horizontal analysis to the company’s operating trends.

Congressional Research Service. “ Cash Versus Accrual Basis of Accounting: An Introduction ,” Page 3 (Page 7 of PDF).

Internal Revenue Service. “ Publication 538 (01/2022), Accounting Periods and Methods: Methods You Can Use. ”

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Introduction to Financial Analysis

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Kenneth S. Bigel, New York City, New York

Publisher: Open Touro

Language: English

Formats Available

Conditions of use.

About the Author
Author's Acknowledgements
Open Touro Acknowledgements
Chapter 1: Introduction
Chapter 2: Financial Statement Analysis: The Balance Sheet
Chapter 3: Financial Statements Analysis: The Income Statement
Chapter 4: Financial Statements and Finance
Chapter 5: Financial Ratios and Forecasting; Liquidity and Solvency Ratios
Chapter 6: Profitability and Return Ratios, and Turnover
Chapter 7: Market Ratios
Chapter 8: Cash Flow, Depreciation, and Financial Projections
Chapter 9: Corporate Forecasting Models
Chapter 10: The Time Value of Money: Simple Present- and Future-Values
Chapter 11: The Time Value of Money: Annuities, Perpetuities, and Mortgages
Chapter 12: Fixed Income Valuation
Chapter 13: Interest Rates
Chapter 14: Equity Valuation and Return Measurement

Ancillary Material

About the book.

This Open Textbook is a dynamic guide incorporating the essential skills needed to build a foundation in Financial Analysis . Students and readers will learn how to insightfully read a Financial Statement, utilize key financial ratios in order to derive forward-looking investment-related inferences from the accounting data, engage in elementary forecasting and modeling, master the theory of the Time Value of Money , and learn to price stocks and bonds in an environment in which interest rates constantly change. Ample problems and solutions, and review questions are provided to the student so that s/he can gauge his/her progress. This text will be continually updated in order to provide novel information and enhance students’ experiences.

About the Contributors

Dr. Bigel was formerly a fixed income analyst in the International Banking Department of the Bankers Trust Company (now DeutscheBank), analyzing international wholesale loans and debt instruments, and a graduate of its Institutional Credit Training Program. He later was affiliated with the Ford Motor Company, conducting investment analysis and planned car profits analysis, annual budgeting, and strategic planning. Subsequently, he worked as a senior portfolio manager attached to the wealth management division of Prudential Securities. He was formerly registered under Series 3, 7, 15, 24, 63, and 65.

As an independent consultant, he was involved in numerous high-profile cases including Enron. Dr. Bigel has conducted executive education programs for Morgan Stanley Capital Markets, Merrill Lynch Capital Markets, UBS, Lehman Brothers, CIBC, G.X. Clarke & Co. (now part of Goldman Sachs), and China CITIC Bank. He currently serves on the Financial Industry Regulatory Association’s Board of Arbitrators.

His extensive published research relates to Financial Ethics and Moral Development, Behavioral Finance, and Political Economy. He has been teaching college and graduate level finance courses since 1989.

Dr. Bigel has been interviewed on American radio, was a visiting scholar at Sichuan University and at Xi’an Jiaotong University in China, and appeared on Chinese television. At Touro University, he is a member of the Faculty Senate, The Touro Academy of Leadership and Management, The Assessments Committee, and The Promotions Committee. He chairs the Integrity Committee at LCM.

His wife and their three children reside in New York City. He enjoys reading, playing 60’s guitar, seeing his students succeed professionally, and watching his kids grow.

Educational Background:

Ph.D., (high honors) New York University, Steinhardt School of Culture, Education, and Human Development (Business Education and Financial Ethics)
M.B.A., New York University, Stern School of Business (Finance)
B.A. (honors), Brooklyn College of the City University of New York (Philosophy and Mathematics)
CFP™, International Board of Standards and Practices for Certified Financial Planners
Hebrew University of Jerusalem (one-year program)

Dr. Bigel welcomes questions and constructive suggestions. He can be reached at <[email protected]>.

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Financial Statement Analysis: An Introduction

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Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making.

Globally, publicly listed companies are required by law to file their financial statements with the relevant authorities. For example, publicly listed firms in America are required to submit their financial statements to the Securities and Exchange Commission (SEC). Firms are also obligated to provide their financial statements in the annual report that they share with their stakeholders. As financial statements are prepared in order to meet requirements, the second step in the process is to analyze them effectively so that future profitability and cash flows can be forecasted.

Therefore, the main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future. Another important purpose of the analysis of financial statements is to identify potential problem areas and troubleshoot those.

Financial Statement Analysis: An Introduction

Here, we will look at 1) the users of financial statement analysis , 2) the methods of financial statement analysis , 3) key accounting reports (the balance sheet, income statement, and statement of cash flows) and how they are analyzed , 4) other financial statement information , and 5) problems with financial statement analysis .

USERS OF FINANCIAL STATEMENT ANALYSIS

There are different users of financial statement analysis. These can be classified into internal and external users. Internal users refer to the management of the company who analyzes financial statements in order to make decisions related to the operations of the company. On the other hand, external users do not necessarily belong to the company but still hold some sort of financial interest. These include owners, investors, creditors, government, employees, customers, and the general public. These users are elaborated on below:

1. Management

The managers of the company use their financial statement analysis to make intelligent decisions about their performance. For instance, they may gauge cost per distribution channel, or how much cash they have left, from their accounting reports and make decisions from these analysis results.

Small business owners need financial information from their operations to determine whether the business is profitable. It helps in making decisions like whether to continue operating the business, whether to improve business strategies or whether to give up on the business altogether.

3. Investors

People who have purchased stock or shares in a company need financial information to analyze the way the company is performing. They use financial statement analysis to determine what to do with their investments in the company. So depending on how the company is doing, they will either hold onto their stock, sell it or buy more.

4. Creditors

Creditors are interested in knowing if a company will be able to honor its payments as they become due. They use cash flow analysis of the company’s accounting records to measure the company’s liquidity , or its ability to make short-term payments.

5. Government

Governing and regulating bodies of the state look at financial statement analysis to determine how the economy is performing in general so they can plan their financial and industrial policies. Tax authorities also analyze a company’s statements to calculate the tax burden that the company has to pay.

6. Employees

Employees need to know if their employment is secure and if there is a possibility of a pay raise. They want to be abreast of their company’s profitability and stability. Employees may also be interested in knowing the company’s financial position to see whether there may be plans for expansion and hence, career prospects for them.

7. Customers

Customers need to know about the ability of the company to service its clients into the future. The need to know about the company’s stability of operations is heightened if the customer (i.e. a distributor or procurer of specialized products) is dependent wholly on the company for its supplies.

8. General Public

Anyone in the general public, like students, analysts and researchers, may be interested in using a company’s financial statement analysis. They may wish to evaluate the effects of the firm on the environment, or the economy or even the local community. For instance, if the company is running corporate social responsibility programs for improving the community, the public may want to be aware of the future operations of the company.

METHODS OF FINANCIAL STATEMENT ANALYSIS

There are two main methods of analyzing financial statements: horizontal or trend analysis, and vertical analysis. These are explained below along with the advantages and disadvantages of each method.

Horizontal Analysis

Horizontal analysis is the comparison of financial information of a company with historical financial information of the same company over a number of reporting periods. It could also be based on the ratios derived from the financial information over the same time span. The main purpose is to see if the numbers are high or low in comparison to past records, which may be used to investigate any causes for concern. For example, certain expenditures that are high currently, but were well under budget in previous years may cause the management to investigate the cause for the rise in costs; it may be due to switching suppliers or using better quality raw material.

This method of analysis is simply grouping together all information, sorting them by time period: weeks, months or years. The numbers in each period can also be shown as a percentage of the numbers expressed in the baseline (earliest/starting) year. The amount given to the baseline year is usually 100%. This analysis is also called dynamic analysis or trend analysis.

Advantages and Disadvantages of Horizontal Analysis

When the analysis is conducted for all financial statements at the same time, the complete impact of operational activities can be seen on the company’s financial condition during the period under review. This is a clear advantage of using horizontal analysis as the company can review its performance in comparison to the previous periods and gauge how it’s doing based on past results.

A disadvantage of horizontal analysis is that the aggregated information expressed in the financial statements may have changed over time and therefore will cause variances to creep up when account balances are compared across periods.

Horizontal analysis can also be used to misrepresent results. It can be manipulated to show comparisons across periods which would make the results appear stellar for the company. For instance, if the profits for this month are only compared with those of last month, they may appear outstanding but that may not be the case if compared with the same month the previous year. Using consistent comparison periods can address this problem.

Vertical Analysis

Vertical analysis is conducted on financial statements for a single time period only. Each item in the statement is shown as a base figure of another item in the statement, for a given time period, usually for year. Typically, this analysis means that every item on an income and loss statement is expressed as a percentage of gross sales, while every item on a balance sheet is expressed as a percentage of total assets held by the firm.

Vertical analysis is also called static analysis because it is carried out for a single time period.

Advantages and Disadvantages of Vertical Analysis

Vertical analysis only requires financial statements for a single reporting period. It is useful for inter-firm or inter-departmental comparisons of performance as one can see relative proportions of account balances, no matter the size of the business or department.

Because basic vertical analysis is constricted by using a single time period, it has the disadvantage of losing out on comparison across different time periods to gauge performance. This can be addressed by using it in conjunction with timeline analysis, which shows what changes have occurred in the financial accounts over time, such as a comparative analysis over a three-year period. For instance, if the cost of sales comes out to be only 30 percent of sales each year in the past, but this year the percentage comes out to be 45 percent, it would be a cause for concern.

KEY FINANCIAL STATEMENTS & HOW THEY ARE ANALYZED

The main types of financial statements are the balance sheet, the income statement and the statement of cash flows. These accounting reports are analyzed in order to aid economic decision-making of a firm and also to predict profitability and cash flows.

I. The Balance Sheet

PEF_D122_balance_sheet_for_the_year_ending_1893-12-31(1)

The balance sheet shows the current financial position of the firm, at a given single point in time. It is also called the statement of financial position. The structure of the balance sheet is laid out such that on one side assets of the firm are listed, while on the other side liabilities and shareholders’ equity is shown. The two sides of the balance sheet must balance as follows:

Assets = Liabilities + Shareholders’ Equity

The main items on the balance sheet are explained below:

Current Assets

Current assets held by the firm refer to cash and cash equivalents. These cash equivalents are assets that can be easily converted into cash within one year. Current assets include marketable securities, inventory and accounts receivable.

Long-term Assets

Long-term assets are also called non-current assets and include fixed assets like plant, equipment and machinery, and property, etc.

A firm records depreciation of its fixed, long-term assets every year. It is not an actual expense of cash paid, but is only a reduction in the book value of the asset. The book value is calculated by subtracting the accumulated depreciation of prior years from the price of the assets.

Total Assets = Current Assets + Book Value of Long-Term Assets

Current Liabilities

Current liabilities of the firm are obligations that are due in less than one year. These include accounts payable, deferred expenses and also notes payable.

Long-term Liabilities

Long-term liabilities of the firm are financial payments or obligations due after one year. These include loans that the firm has to repay in more than a year, and also capital leases which the firm has to pay for in exchange for using a fixed asset.

Shareholders’ Equity

Shareholders’ equity is also known as the book value of equity or net worth of the firm. It is the difference between total assets owned by a firm and total liabilities outstanding. It is different from the market value of equity (stock market capitalization) which is calculated as follows: number of shares outstanding multiplied by the current share price.

Balance Sheet Analysis

The balance sheet is analyzed to obtain some key ratios that help explain the health of the firm at a given point in time. These metrics are as follows:

Debt-Equity Ratio = Total Debt / Total Equity

The debt-equity ratio is also called a leverage ratio. It is calculated to assess the leverage, or gearing, of a firm to show how much it relies on debt to finance its activities. This ratio has pertinent implications for the financial health of the firm and the risk and return of its shares.

Market-to-Book Ratio = Market Value of Equity / Book Value of Equity

The market-to-book ratio is used to reflect any changes in a firm’s characteristics. The variations in this ratio also show any value added by the management and its growth prospects.

Enterprise Value = Market Value of Equity + Debt – Cash

The enterprise value of a firm shows the underlying value of the business. It reflects the true value of the firm’s assets, not including any cash or cash equivalents, while unencumbered by the debt the firm carries.

II. The Income Statement

Microsoft_10-K_Fiscal_2010_Selected_Financial_Data - Income statement

The purpose of an income statement is to report the revenues and expenditures of a firm over a specific period of time. It was previously also called a profit and loss account. The general structure of the income statement with major components is as follows:

Sales revenue

– Cost of goods sold (COGS)

= Gross profit

– Selling, general and administrative costs (SG&A)

– Research and development (R&D)

= Earnings before interest, taxes, depreciation and amortization (EBITDA)

– Depreciation and amortization

= Earnings before interest and taxes (EBIT)

– Interest expense

= Earnings before taxes (EBT)

= Net income

The net income on the income statement, if positive, shows that the company has made a profit. If the net income is negative, it means the company incurred a loss.

Earnings per share can be derived from knowing the total number of shares outstanding of the company:

Earnings per Share = Net Income / Shares Outstanding

Income statement Analysis

Some useful metrics based on the information provided in the income statement and the balance sheet are as follows:

Profitability Ratios:

1. Net profit margin: This ratio calculates the amount of profit that the company has earned after taxes and all expenses have been deducted from net sales.

Net profit Margin =Net Income / Net Sales

2. Return on Equity: This ratio is used to calculate company profit as a percentage of total equity.

Return on Equity = Net Income / Book Value of Equity

Valuation Ratios:

Price to earnings ratios (P/E ratio)

The P/E ratio is used to evaluate whether the value of a stock is proportional to the level of earnings it can generate for its stockholders. It assesses whether the stock is overvalued or undervalued.

(P/E) Ratio = Market Capitalization / Net Income = Share Price / Earnings per Share

III. The Statement of Cash Flows

The statement of cash flows shows explicitly the sources of the firm’s cash and where the cash is utilized. It is essentially a statement whereby the net income is adjusted for non-cash expenses and any changes to the net working capital. It also reflects changes in cash coming from, or being used by, investing and financing activities of the firm. The structure and main components of the cash flow statement are as follows:

Cash from operating activities = Net income + Depreciation ± Changes in net working capital

Cash from financing activities = New debt + New shares – Dividends – Shares repurchased

Cash from investment activities = Capital expenditure – Proceeds from sales of long-term assets

All three of the above determine the bottom line: changes in cash flows.

Cash Flows Statement Analysis

In order to measure how much cash is available to the company for investments without outside financing or money diverting from operations, it is useful to conduct a simple cash flow statement analysis. The free cash flow, as the name suggests, allows a company to be able to pay dividends, repay its debts, buy back its stock and also make new investments to facilitate future growth. The excess cash produced by the company, free cash flow, is calculated as follows:

+ Amortization/Depreciation

– Changes in Working Capital

– Capital Expenditures

= Free Cash Flow

Some analysts also study the cash flow from operating activities to see if the company is earning “quality” income. In order for the company to be doing extremely well, the cash from operating activities must be consistently greater than the net income earned by the company.

OTHER FINANCIAL STATEMENT INFORMATION

Apart from the key financial statements, complete financial reporting statements also include the following:

Business and Operating Review

The business and operating review is also called “management discussion and analysis”. It serves as a preface to all the complete reporting statements in which the management talks about recent events, discloses essential information regarding expansion and future plans, and discusses significant developments in the business industry.

The business and operating review is a good place for the company to share any good news with the general public. They have room to elaborate on plans that would help enhance the company’s image and address any unpleasant events that may have occurred, to show the customers that they truly care about talking openly to their customers.

Statement of Change in Shareholders’ Equity

The statement of change in shareholders’ equity is also known as equity analysis. It provides information about all the changes in the company’s equity value over a certain time period. It reconciles the opening balances of the equity accounts with the closing balances. There are two types of changes expressed in the statement of change in shareholders’ equity:

Changes arising from any transactions conducted with shareholders of the company. For example, issuing new shares, paying dividends, purchasing treasury stock, and issuing bonus shares, etc.
Changes that are a result of alterations in the comprehensive income of the company. These changes might include revaluation of fixed assets, net income for the period and fair value of for-sale investments, etc.

Notes to the Financial Statements

Notes to the financial statements are basically additional information provided in a company’s financial statements. These notes provide details and information that are left out of the main reporting documents. They are important for the sake of clarity on many points as they outline the accounting methodology used for recording certain transactions. The notes to the financial statements are essentially footnotes because if included in the main statements, they would obscure the important information, as they are generally quite elaborate and detailed.

The following notes are usually used to impart important disclosures for explaining the numbers on the financial statements:

Notes that show the basis for presentation
Notes that advise on significant accounting policies
Notes about valuing inventory
Notes about depreciating assets
Notes about intangible assets
Notes that disclose subsequent events
Notes about employee benefits
Notes that reveal contingency plans

PROBLEMS WITH FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is a brilliant tool to gauge the past performance of a company and predict future performance, but there are several issues that one should be aware of before using the financial statement analysis results blindly, as these issues can interfere with how the results are interpreted. Some of the issues are:

Comparability between Companies

This is a big issue for analysts because they can seemingly compare financial statement analyses between different companies on the basis of ratios used, but in reality it may not paint an accurate picture. The financial ratios of two different companies may be compared to see how they match up against each other, but each company may aggregate all their information different from each other in order to draw up their accounting statements. This may lead to incorrect conclusions drawn about a company in relation to other companies in the industry.

Comparability between Periods

The change in accounts where financial information is stored may skew the results of the financial statement analysis, from one period to the next. For example, if a company records an expense in one period as cost of goods sold , while in another period, it is recorded as a selling and distribution expense, the analysis between those two periods would not be comparable.

Operational Information

Analysts do not take into account operational information of a company, as only financial information is analyzed and reviewed. There may be several indicators in operational information of the company which may be predictors of future performance, for example, the number of backlogged orders, any changes in licenses or warranty claims submitted to the company or even changes in the culture and work environment. Therefore, analysis of financial information may only relay half the story.

Image credit: Wikimedia Commons under public domain , Wikimedia Commons | Microsoft under public domain .

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How to Write a Financial Analysis Paper

Jun 20, 2018 | Writing

A financial analysis is a paper that contains the details of the company’s financial health. Even though the firm’s history, financial statements and stock performance can summarize various aspects of its financial performance, the financial analysis paper incorporates all the info into a comprehensive form. A financial analysis paper helps lenders, investors and financial analysts to determine if a business can deliver a solid return on investment.

Composing a company’s comprehensive financial analysis helps investors to determine whether to invest in the business. while there is no specific approach to write the document and its presentation styles tend to vary, the key components must be incorporated on any financial analysis. Once all the component of a financial analysis has been carefully reviewed, a conclusion can be made regarding the financial health of a particular business.

A good financial analysis should have an executive summary

An executive summary section comprises the most significant results from the financial analysis in a concise and easy-to-read format. This section encapsulates the data presented in the rest of the report, comprising the implications those statistics have in the industry in a general and the company at large. The summary section can comprise brief summaries of the firm’s mission, history, current performance, and expected outlook. Additionally, the section will include a summary if the firm’s industry, market situation and competition.

Bear in mind that the core of a good financial analysis paper is the collection of the firm’s financial statements. The statements include the balance sheet, equity statement, income statement and cash flow statement. The balance sheet will display the firm’s allocation of assets, liabilities and shareholder’ equity. On the other hand, the income statement will display the firm’s income, expenditure, losses and profits. The equity statement is used to show the changes in the amount of shareholder’s equity while the cash flow will stipulate where the firm obtained its cash and how it was spent.

It is evident that no business exists in a vacuum and for this reason, a financial analysis should have an examination of the firm’s industry. The report will consist of a clear comparison between the firm’s financial health and that of its competitors. Additionally, it will report the firm’s market share and prominence in the industry. All these factors assist the investors to determine if the form is competing well in its industry and could make a lucrative investment.

Financial ratios help in revealing various significant aspects such as the company’s liquidity, debt load and efficiency. The current liquidity ratio is referred to as the ratio of the firm’s current assists to its current liabilities. On the other hand, the debt ratio is the ratio of the firm’s total debt to its total equity, while the return ratio weighs a company’s profits against its shareholder’s equity. The price to income ratio can be computed by dividing the present market price per share by the after tax income per share.

The procedure of writing a professional financial analysis paper can be instrumental in ensuring that an investor gets all the information needed when researching a business. below is an outline of the primary sections to ponder when composing a financial analysis paper for a certain company.

A good financial paper must begin with a description of the business so that it can assist investors understand the company, its industry, its motivation and any advantage it has over its competitors. Note that these aspects play a vital role in assisting to explain if a business can be lucrative venture or not. A company’s annual report with securities and exchange commission tend to offer a perfect starting points.

The incentive for bullish or bearish stance on a firm is uncovered in this part. It can come at the top of a report include parts of a firm overview, but regardless of its position in an analysis must cover the primary investment negatives and positives. A fundamental analysis that contains the financial statements like sales and profit growth trends, cash flow generation strength, debt level and company’s liquidity can be included in the investment thesis. Note that no information is too insignificant in this section since it can as well cover efficiency ratios like the core components in the cash conversion cycle, turnover ratios and detailed breakdown of return on equity components.

The most vital component of analyzing previous growth trends is to synthesize it into a forecast of the business’s performance. A good financial analysis paper will help analyst to accurately extrapolate the past trends into the future. Additionally, it helps them decide which aspects are more significant in defining success for a business.

The most significant section of any financial analysis is to arrive to an independent value for the stock and compare this to the current market price. However, there are three key valuation techniques you need to ponder. The first one is the discount cash flow analysis that helps in estimating the business’s future cash flow and discount them back to the future at a projected discount rate. The second one is the relative value where the fundamental metrics and valuation ratios such as price to sales ratio, price to income ratio and P/E to business growth ratio are compared competitors. Another key contrast is to consider is what other competitors have been out for or the price paid for a purchase. The last technique is looking at the book value and try to estimate what the business may be worth if it collapses or liquidated.

The part can be either the bull or bear story in the investment thesis, but it helps to detail the key aspects that might disrupt either an optimistic or bearish stance. The above mentions sections can prove sufficient, but based on the things that are covered during a financial analysis, other new parts may be included in the paper. Parts that are meant to cover corporate governance, political environment or near-term news flow can be worthy of a comprehensive financial analysis paper. Bear in mind that anything significant that can affect the future value of a stock must be included in the paper.

How to Write a Financial Analysis Report for Your Business

What is a financial analysis report?

A financial analysis report shows the financial performance of your business over a specified period of time, usually on a quarterly or yearly basis. It's like a medical report but for your business's financial health.

In several countries, financial reporting is a requirement. The Securities and Exchange Commission requires companies to disseminate these digital reports to their shareholders in the United States. In addition, these financial reports are usually made available to the public if they're publicly-listed companies

A financial analysis report is invaluable to both you and your stakeholders. Let's discuss why you need it in the next section.

How does a financial analysis report help?

To make the right financial decisions for your business, you need data. This helps you lay a solid foundation for future performance and economic growth opportunities.

However, you need to be able to keep track of and make sense of all your financial data. That's where a financial analysis report comes in. It helps you organize, analyze, and paint a clearer picture of your business's cash flow and allows for seamless management of business expenses too.

Aside from those, here are a couple of more reasons why you need a financial analysis report:

Ensures transparency

A financial analysis report is easy on the eyes. It's a watered-down version of your finances that communicates essential data you need to make financial decisions.

You ensure the transparency your stakeholders want, too.

Tracks cash flow

Generally, financial reports help you understand cash inflows and outflows . For example, if you know your affiliate sales and operating expenses, the cost of getting links to increase website traffic , social media marketing campaign expenditure, and the money coming in, you can make better financial decisions.

The information can help with debt ratios, budgeting, debt-to-asset financial ratio analysis, and calculating profit margins.

Suggested Reads: 10 Ways to Improve Your Business's Finance Position

Allows for data-driven forecasting

Historical and real-time financial data help create financial models to predict future financial performance. These reports help you identify trends, patterns, and problems. As a result, you can plan for them early enough.

Simplifies taxation

To create a financial analysis report, you must have all your data in a single document. It becomes easier for you to do your taxes, saves you time, and reduces the chances of making errors. Moreover, it's an official document that the Internal Revenue Service can use to calculate your taxes.

At the end of the day, the goal of a financial report is to provide insight into your organization's finances. Then, using both historical and current data, you can set SMART business goals to make better decisions for future performance.

Finally, it's essential to consider the ongoing nature of financial analysis and the need for periodic reviews. Implementing a project review process allows you to regularly assess the financial health of your business, identify any emerging trends or issues, and make informed adjustments to your financial strategies. This continuous evaluation ensures that your financial analysis remains up-to-date and relevant, providing you and your stakeholders with accurate insights into your business's performance.

Suggested Reads: 2022 Business Expense Categories Cheat Sheet: Top 15 Tax-Deductible Categories

Benefits of a periodic financial analysis

Financial analysis makes it easy for you to identify the strengths and weaknesses of your business. Using that information will not only help your business grow but also thrive. What's more, doing financial analysis over specific periods helps you stay on top of your game by:

Helping manage debts

A periodic financial analysis includes a financial ratio analysis; specifically, a Liquidity Ratio called the Current Ratio Analysis. The Current Ratio is the sum of all your current assets divided by the sum of your current liabilities. It shows if you're liquid enough to meet your upcoming debts. So, if you aren't, you can adjust your financial strategy the soonest.

Determining profitability

When you perform a periodic financial analysis, you can determine your company's profitability and make regular adjustments. A profitability ratio is a financial metric that can help you cut production costs and boost your bottom line.

You can use a profitability ratio (featured below) to determine your profit margin on sales, i.e., your gross profit margin. Here's the formula.

It's your sales revenue minus the total cost of goods sold (COGS) divided by revenue.

Managing inventory

Another perk of doing financial analysis over a specific period is that it helps you better manage inventory . This way, you ensure it's always enough to meet projected sales. You do this using a financial management ratio called the Inventory Turnover Ratio.

Calculate the Turnover Ratio by dividing your total sale by your inventory.

Checking stability and revenue growth

The results of a periodic financial analysis yield your debt-to-equity ratio, too. It's a financial metric that shows how you've raised capital for your business. You want to check your stability and revenue growth every step of the way to determine whether your business is viable in the long run.

The debt-equity ratio is calculated by dividing your total liabilities by your shareholder's equity. It's usually included when you write a financial analysis report.

Generally speaking, the higher your debt-equity ratio, the higher the risk, and vice versa. Investors use this financial metric to check your company's stability and ability to raise money to grow.

Optimizing for growth

Financial analysis over specific periods helps you identify opportunities to optimize operational efficiency for revenue growth. That is, regular annual reports help you spot patterns and trends. This allows you to nip problematic areas in the bud and prepare in advance.

For instance, you can adjust seasonal sales fluctuations, variable costs, etc.

How to write a financial analysis report

Now that you understand a financial analysis report's 'what' and 'why,' it's time to look at the 'how.'

Here's how to write a financial analysis report:

1. Give an overview of the company

The first section of your financial analysis report is the company overview. Here, you want to highlight the potential of your business. It's pretty much what you do in a business plan . Investors rely on your company overview to understand your competitive edge.

The question you want to answer here is - is your business worth the investment you're asking for? Think of the introductions in business plans or on Shark Tank to give you a better idea. As a general rule of thumb, you want to use plain language when writing your description.

You want to share, in brief, your history, business model, type of organization, description, etc. You can share what sector you're in as well as the size and scale of your business.

Featured below is an excellent example of a fictional company's overview.

Start by reviewing your quarterly or yearly financing activities, financial data, and statements. Then go through published business studies and industry-specific trade journals.

You should consider adding a snippet about how you compare to the industry average among your competitors. Like a business plan, you want to show potential investors why they should choose you. You can use Porter's Five Forces model to analyze your competition.

2. Write sales forecast and other vital sections

It pays to be as precise and comprehensive as possible when writing the main content. So, you’ll need to organize your data and, sometimes, make some calculations yourself. For instance, when writing your sales forecast , you need your sales data for the past three years before you organize it in financial reporting software or spreadsheets. Tally the data on a yearly, monthly (for the 1st year), and quarterly (for the last two years) basis.

You can write this part using a spreadsheet. But feel free to use financial reporting software if spreadsheets aren’t your cup of tea.

There are other sections you should create for your report’s main body.

Let’s look at them one by one:

Expense budget

With your sales forecast in place, it's time to figure out how much it'll cost. When setting up your expense budget , ensure it includes variable costs like your marketing budget and fixed costs like rent. In addition, you'll need to create an estimate for items like interest and taxes.

Cash flow statement

A cash flow statement summarizes all the money or its equal coming in (cash inflow) or leaving (cash outflow) a business. To create one, you need historical financial data or project it one year ahead if you're starting. Don't forget your cash flow statement is connected to your invoice.

Estimate for net profit

Tally your net profit using your sales forecast, expense budget, and cash flow statement data. Your net profit margin is your gross margin less taxes, interest, and expenses. Try and be as precise as possible since this can stand in as your profit and loss (P&L) statement .

Estimate for assets and liabilities

Your next step is to calculate your company's net worth. How? By managing your assets and liabilities, i.e., those items that don't appear in your P&L statement.

To do that, ballpark your monthly cash on hand. That is, equipment, inventory, land, and accounts receivable. Then sum up your liabilities, i.e., outstanding loan debts and accounts payable.

Break-even point

The last step in writing a company financial analysis report is calculating your break-even point. That's where your business expenses match your sales volume. Use the formula below to find your three-year sales forecast; this will help you find your break-even point.

Needless to say, if you're operating a profitable business model, then your company's revenue should be higher than your operating expenses. Again, this information helps reassure potential investors of your business' stability and revenue growth potential.

Refrain from assuming that people know the concepts you'll discuss in your report. Instead, define them in general terms first before you start talking about specifics.

3. Determine the company's valuation

The company valuation part is one of the most critical sections of your financial analysis report. Why? Because it helps potential investors see the value of investing in your company.

To determine your business' valuation is to find your company's value. You do this by analyzing your company data, including all the data you have discussed. There are three main ways to do it, i.e., using the following:

Discounted Cash Flow (DCF) Analysis
Book Value Analysis
Relative Value Method

The goal here is to outline your current assets and liabilities. Moreover, the above techniques help you determine your business' stocks and current value. To do this, most accountants or financial officers use insights from and final average accounts of your balance sheet.

4. Perform risk analysis

Risk analysis helps potential investors see your company's investment potential. That includes both current and future risks. You can start risk analysis by running a SWOT analysis .

But remember that your SWOT analysis is microscopic. So for the best results in your valuation, combine it with other techniques. For example, doing a PESTLE analysis . Here's a template you can use for that:

A PESTLE analysis gives you more details and offers two main benefits. First, it helps you understand your marketing environment and other macro factors that affect your company's financials.

5. Include summaries of financial statements

When writing the financial analysis report of a company, you need to include a brief overview of your company's financial statements. To do this, summarize each component of the 3-statement model:

Let's discuss each of them:

Cash flow statement. Potential investors look at your cash flow statement summary for two reasons. One, it lets them see if you make enough money to settle your debts. Two, it helps them decide whether your company is worth investing in.

Income statement . A summary of this does two things. First, it shows you gaps in increasing operating profit by allowing you to boost sales revenue , reduce cost, or both. It's also an income statement showing how effective your strategies are at the start of your financial year.

Balance sheet. The balance sheet shows your debt coverage and asset liquidity in real time. The difference between assets and liabilities gives you the 'owner's equity.' Here's an example of a balance sheet:

Note that summarizing each of these three components doesn't mean just including tables in your report. Instead, explain what the data means in paragraph form, too.

6. Summarize the entire report

The last section of the financial analysis report of a company is a summary. You want to share your final views about the company and your opinion on whether it's a profit or loss. That said, be sure to substantiate all your claims.

That means having evidence containing factual data, financial accounts, and proven financial theories. You can also include the outlook of the company. That is the type of organization, industry trends, economic growth strategies, and how they'll affect the company.

In conclusion

By now, you should understand the value of a company financial analysis report and how to write one. Not only does it show you the financial health status of a company, but it's also the smoking gun investors look for before investing in any business.

To any organization, a financial analysis report is a compass to optimize operational efficiency for growth. It is also a crucial part in portfolio management especially when you need to open your business up to other stakeholders.

Summarising, to write a financial analysis report, you need to:

Write your company overview , sales forecast, and other essential sections. Once those are out of the way, you can perform company valuation and risk analysis. Then, all that's left is to summarize what was discussed.

Daryl Bush is the Business Development Manager at Authority.Builders . The company helps businesses acquire more customers through improved online search rankings. He has extensive knowledge of SEO and business development.

How to Write a Financial Analysis Report in 6 steps

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Financial Analysis: Problems and Calculations Essay

Introduction, background of the problem, calculations.

Financial analysis is a rather complicated matter to deal with because it involves the knowledge of different aspects of such sciences as economics, mathematics, etc., and presupposes the presence of the analytical way of thinking from the side of the person that deals with the analysis. Finance itself is a very interesting thing to write about as people who willingly deal with finance or are made to deal with it always get to know a lot of new things while exploring the topic.

Financial problems

So, that is why this very analysis will deal with a rather difficult but, at the same time very interesting topic of the financial analysis. The analysis aims to examine the financial problems that were experienced by different firms and companies at certain stages of their development and to analyze how these problems influenced the financial side of the company’s work. The activities that will be carried out in this analysis are connected with the average assessments of the companies’ costs of capital, calculating the possible prices for the stocks of companies, defining the approximate prices for the companies’ shares, determining the rate of the companies’ growth, etc.

Basic Notions

The current financial analysis will deal with different economic problems using specific examples from existing companies that still operate in the market. The keywords and notions of the analysis are exchange rate, price of the stock, expected return of the financial system, the rate of growth of a company. These notions will be explained in the analysis in order to avoid any possible cases of ambiguity that might occur in another case.

Specific Examples

The problems that are going to be considered in the analysis are examined using specific examples, such as the following:

calculation of the weighted average cost of capital (WACC) of the firm Hilliard Corp.;
assessment the prices of common stocks of such companies as J. Ross and Sons Inc.;
detection of the return rate of the stock of the company Grant Corporation;

The analysis of the financial systems and data will involve a set of different methods that can help the research in their own way. The method of mathematical calculation proved to be a reliable one while dealing with problems of such kind. All the formulae that are used in the analysis also helped much in the work. Besides, such methods as a case study, survey making, and others make it easier for people to gather and systematize the knowledge got from the work in order to carry out the successful calculations and the following analysis. So, now let us proceed to the next stage of this analysis which is called “Calculations”.

Hilliard Corp.

This very company expressed the wish to have the weighted average cost of its capital calculated. To do, this the company carried out a huge piece of work and gathered the following information. It became evident that the company’s long-term bonds nowadays offer a yield of 8 percent maturity. The fact that the price of the company’s stock comprises a sum of 32$ per share can not be deprived of attention as well.

The same is true about the recently paid dividends that reached the level of 2$ per share and promise to develop next year up to 6$ per share. All the above-mentioned data and figures allow us to conduct the calculations and state that the weighted average cost of its capital of the company Hilliard Corp will be approximately at the level of 12%.

J. Ross and Sons Inc.

This company is concerned with the issue of calculating the cost of its common stock, as well as the cost of the newly issued preferred stock and the calculation of its weighted average cost of the capital. Based on the conducted calculations we can present the following results. The cost of the company’s common stock will amount to the level of 70$ per share, while the cost of the newly issued preferred stock will be at the level of 90$ per share. Drawing from this we can conclude that the weighted average cost of the capital of this very company will be at the level of 10.8%

Mack Industries

The company experienced the growth of the cost of its stock that reached the level of 20% this year and is said to grow 15% more in the next year. The following years are supposed to witness a constant growth of 5% per year. It is evident that if the planned rate of the expected return of the company must equal 12%, the price of the common stock per share must also grow. In the following year it must be already at the level of 1.35$ per share and every year the cost will increase by 0.05$.

Grant Corporation

The corporation considered in this very point of the analysis is one of the leaders in the market of stock and it needs some calculations to be carried out as for the growth rate of the cost of this company’s stock. The information given runs as follows: nowadays the stock is sold at the rate of 40$ per share while dividends amount to 2$ (Do = 2$). The required return rate is 13.8%. As can be understood after considerable calculations, the growth rate for this stock is at the level of 10.8%.

Philadelphia Corporation

The Corporation from Philadelphia has a considerable growth in the cost of its stock, which is demonstrated by the following figures: the dividends are paid in the sum of 2$ per share, while the required rate of the return is 15%, and the annual growth rate of the company is 5%. This allows us to say that the stock of this company is sold at the price of 35$ per share.

Yohe Technology

The company sells its stock at the price of 40$ per share and pays dividends in the sum of 2$. The risk premium is at the level of 7%, and the risk-free rate is 5%. In order to find out what will be the cost of the company’s stock in 5 years, we shall trace the growth of the sum of the dividend that is supposed to grow steadily at a certain percent indicated as “g”. If we take the “g” as the sum of 5%, we can clearly see that in 5 years the stock of the company will cost 50$ per share.

This internet giant has issued 15-year bonds that are callable in the period of 5 years and have a coupon rate of 9%. The bonds are sold at the market at the price of 1,100$ per share. We need to calculate what will be the yield to call of bonds and by using the method of simple mathematical calculations we can state that the yield to call of the bonds will be at the level of 1, 230$ per share.

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IvyPanda. (2021, October 29). Financial Analysis: Problems and Calculations. https://ivypanda.com/essays/financial-analysis-problems-and-calculations/

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IvyPanda . 2021. "Financial Analysis: Problems and Calculations." October 29, 2021. https://ivypanda.com/essays/financial-analysis-problems-and-calculations/.

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Comparative Financial Statement Analysis

Introduction.

A variety of similar patterns can be observed across the large-scale companies in the modern business environment, particularly in the area of budgeting and organizational financing. Provided the companies are operating within the same economy and industry, they are subjected to an identical set of laws and regulations, as well as the demands of the free market. However, individual characteristics connected to their respective histories and managerial practices definitely impact the financial affairs of each firm separately.

A comparative analysis might be then carried out to compare and contrast the general information on the companies, and, more importantly, their accounting methods and existing ratios. This paper aims to carry out the aforementioned steps, as well as provide final budgeting recommendations for Coca-Cola, Dr Pepper, and Pepsi Co.

Company Overview

Coca-Cola is the leading manufacturer, marketer, and retailer of non-alcoholic beverages, and specializes on fizzy drinks. Headquartered in Atlanta, Georgia, the firm produces a wide range of drinks that are then distributed and sold in over 200 countries around the world. The key brands of the firm are well-established and internationally known, with the biggest names on brand portfolio including Coca-Cola itself, Fanta, and Sprite.

At the moment, the Coca-Cola company’s priority is to branch out into a healthier and wider range of available drinks, including sports beverages, vitaminized coffee and a recently purchased smart water formula.

Thus, their current strategy is largely focused on a disciplined portfolio growth that plays a key role in the company’s journey towards manufacturing beverages for life. Disciplined portfolio growth is maintained through an emphasis on innovation, revenue growth analysis and consistently perfected formulas, which together constitute the basis of the Coca-Cola branding. Following the emerging sustainability regulations, Coca-Cola is going through a transformation in their approach to bottling and distribution. The firm has partnered with an updated set of suppliers whose practices go hand in hand with the green supply chain management demands.

Dr Pepper is the oldest out of the currently operating soft drink manufacturing companies in America, being first established back in 1904 in Louisiana. At present, Dr Pepper Snapple Group is based in Plano, Texas, and as of July 2018 forms a part of a recently founded and publicly traded conglomerate Keurig Dr Pepper. As a non-alcoholic beverage industry is an exceptionally competitive environment for every firm, that is not a part of the Coca-Cola, Dr Pepper has put an emphasis on diversification (Heley at al., 2020).

Despite slow sales in the overall non-cola carbonated soft drink market, many top managers within the company believe that flavored soft drinks show room for growth. Dr Pepper managers believe, that as consumers grow tired of the cola taste, flavored soft drinks are the “sweet spot” in the industry. Recently, Dr Pepper has made a number of changes to its soft drink brands, such as the addition of a new Green Tea Ginger Ale, the introduction of an updated 7UP with added antioxidants, a recipe change for A&W Root Beer which now incudes vanilla, and the development of Dr Pepper Cherry.

PepsiCo is a multipurpose global conglomerate of companies, which includes such firms as Pepsi-Cola, Frito-Lay, Gatorade and Tropicana. Despite Pepsi-Cola being the most well known association with the conglomerate name, it overall presents a notably more diverse portfolio of brands and products (Rahimo et al., 2020). Consecutively, the PepsiCo holds the position of the global leader in the overlap between convenience foods and beverages, aiming for wide assortment rather then precision. It has frequently engaged in a competitive marketing with Coca-Cola, with each company aiming to openly outshine the other with advertising projects and slogans.

However, in the recent years the PepsiCo’s branding approach has changed, with the company instead attempting to benefit from a socially responsible perception. PepsiCo aims for its sustainable policies to enhance their brand growth, while benefiting the local communities and the planet. The biggest internal managerial challenges PepsiCo is currently facing concerns the need for a company to operate as a singular united body despite the multiple firms that form its parts. This challenge is addressed by enforcing an emphasis on the inventory optimization across factories, holding them to the same standard, and continuous development of the communication channels.

Comparison of Accounting Methods

As Coca-Colas official website suggests, at the moment the firm is focused on reinvesting their cash money back into corporate growth and production increase. Other budgeting aims include regular and consistent provision of return on investment to shareholders and commitment to the consumer-centric M&A. Coca-Cola’s accounting is therefore balancing between financial risks, strategic rationale and short-term returns (Rahimo et al., 2020). As the industry leader, the corporation has access to a large body of capital. However, as the cash assets are consistently being reinvested into further portfolio diversification and brand development, Coca-Cola’s liquidity remains comparatively low.

Dr Pepper is currently investing a large section of its profits into the advertising and other forms of promotion. The firm’s marketing expenses have risen consistently since the year 2007, which arguably correlates with Dr Pepper’s emphasis on updating the assortment of flavored soda drinks. Budgeting specialists in Dr Pepper are expected to work closely with the manufacturers and operate with data-driven insights in mind. Accounting department provides a decision-making support, drives cost efficiencies, and strategizes on process improvements.

PepsiCo accounting relies on a detailed understanding of corporate legislation and ensuring the firm harnesses the benefits provided by the economies of scale and broad brand portfolio. The cross-budgeting confusions are avoided by the separation of responsibilities between the accounting specialists in each separate company division. Transparency and clear report mechanisms are established throughout the conglomerate to ensure effective financial management and accountability of incomes and expenses.

Ratio Analysis

Coca-Cola generates substantial profits, as indicated by the profitability ratios figures in the company ratio assessment. The profit figures of Coca-Cola are the highest among the three companies discussed in this paper, indirectly confirming its position as the industry leader. Overall the profitability remains consistently high without significant changes in the revenue despite the volatility of the market demand. This phenomenon might be explained with the large scale of production and diversified brand portfolio that Coca-Cola possesses, as well as their well-known formulaic signature taste. Inventory and asset turnovers is comparatively low, indicating efficient internal management of assets and successful maintenance of the equipment,

Dr Pepper generates substantial profits, as indicated by the profitability ratios figures in the company ratio assessment. The gross profit percentage of the firm has increased within the last three years, illustrating the positive impact of the chosen branding strategy. Overall Dr Pepper is a profitable company, but their current and quick rations are comparatively low. This indicates that the firm does not have a significantly larger amount of assets if compared to liabilities. Its inventory turnover is higher than Coca-Colas, potentially requiring a more efficient equipment management.

PepsiCo generates substantial profits, as indicated by the profitability ratios figures in the company ratio assessment. However, their net profit is the lowest out of the three companies including in the comparison, indicating the potential need for financial restructuring. The company’s quick and current ratios exceed Dr Pepper, although remain lower than those of Coca-Cola. It might be assumed that PepsiCo has a comfortably greater amount of assets when compared to liabilities. However, inventory turnover ratio is somewhat concerning, as this number is not justified by a substantial revenue growth.

Final Recommendation and Conclusion

Basic ratio analysis indicates inventory management to be a somewhat overlooked area in the financial organization of the three firms. However, a researcher must remember, that as production-oriented companies, the non-alcoholic beverage manufacturers heavily rely on the capacity and state of their equipment. As a result, it requires frequent upgrades and provides maintenance costs, which understandably affect companies’ budget. Otherwise the chosen budgeting strategies of Coca-Cola, Dr Pepper and PepsiCo appear to be effective, adequately satisfying all of the firms’ relevant needs.

Heley, J., Welsh, M., & Saville, S. (2020). The fanta-sy of global products: fizzy-drinks, differentiated ubiquity and the placing of globalization. Globalizations , 17 (4), 683-697. Web.

Raimo, N., de Nuccio, E., Giakoumelou, A., Petruzzella, F., & Vitolla, F. (2020). Non-financial information and cost of equity capital: An empirical analysis in the food and beverage industry. British Food Journal., 123 (1), pp. 49-65. Web.

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How to Write an Essay Introduction (with Examples)  

The introduction of an essay plays a critical role in engaging the reader and providing contextual information about the topic. It sets the stage for the rest of the essay, establishes the tone and style, and motivates the reader to continue reading.

What is an essay introduction , what to include in an essay introduction, how to create an essay structure , step-by-step process for writing an essay introduction , how to write an introduction paragraph , how to write a hook for your essay , how to include background information , how to write a thesis statement .

Argumentative Essay Introduction Example:
Expository Essay Introduction Example

Literary Analysis Essay Introduction Example

Check and revise – checklist for essay introduction , key takeaways , frequently asked questions .

An introduction is the opening section of an essay, paper, or other written work. It introduces the topic and provides background information, context, and an overview of what the reader can expect from the rest of the work. 1 The key is to be concise and to the point, providing enough information to engage the reader without delving into excessive detail.

The essay introduction is crucial as it sets the tone for the entire piece and provides the reader with a roadmap of what to expect. Here are key elements to include in your essay introduction:

Hook : Start with an attention-grabbing statement or question to engage the reader. This could be a surprising fact, a relevant quote, or a compelling anecdote.
Background information : Provide context and background information to help the reader understand the topic. This can include historical information, definitions of key terms, or an overview of the current state of affairs related to your topic.
Thesis statement : Clearly state your main argument or position on the topic. Your thesis should be concise and specific, providing a clear direction for your essay.

Before we get into how to write an essay introduction, we need to know how it is structured. The structure of an essay is crucial for organizing your thoughts and presenting them clearly and logically. It is divided as follows: 2

Introduction:  The introduction should grab the reader’s attention with a hook, provide context, and include a thesis statement that presents the main argument or purpose of the essay.
Body:  The body should consist of focused paragraphs that support your thesis statement using evidence and analysis. Each paragraph should concentrate on a single central idea or argument and provide evidence, examples, or analysis to back it up.
Conclusion:  The conclusion should summarize the main points and restate the thesis differently. End with a final statement that leaves a lasting impression on the reader. Avoid new information or arguments.

Here’s a step-by-step guide on how to write an essay introduction:

Start with a Hook : Begin your introduction paragraph with an attention-grabbing statement, question, quote, or anecdote related to your topic. The hook should pique the reader’s interest and encourage them to continue reading.
Provide Background Information : This helps the reader understand the relevance and importance of the topic.
State Your Thesis Statement : The last sentence is the main argument or point of your essay. It should be clear, concise, and directly address the topic of your essay.
Preview the Main Points : This gives the reader an idea of what to expect and how you will support your thesis.
Keep it Concise and Clear : Avoid going into too much detail or including information not directly relevant to your topic.
Revise : Revise your introduction after you’ve written the rest of your essay to ensure it aligns with your final argument.

Here’s an example of an essay introduction paragraph about the importance of education:

Education is often viewed as a fundamental human right and a key social and economic development driver. As Nelson Mandela once famously said, “Education is the most powerful weapon which you can use to change the world.” It is the key to unlocking a wide range of opportunities and benefits for individuals, societies, and nations. In today’s constantly evolving world, education has become even more critical. It has expanded beyond traditional classroom learning to include digital and remote learning, making education more accessible and convenient. This essay will delve into the importance of education in empowering individuals to achieve their dreams, improving societies by promoting social justice and equality, and driving economic growth by developing a skilled workforce and promoting innovation.

This introduction paragraph example includes a hook (the quote by Nelson Mandela), provides some background information on education, and states the thesis statement (the importance of education).

This is one of the key steps in how to write an essay introduction. Crafting a compelling hook is vital because it sets the tone for your entire essay and determines whether your readers will stay interested. A good hook draws the reader in and sets the stage for the rest of your essay.

Avoid Dry Fact : Instead of simply stating a bland fact, try to make it engaging and relevant to your topic. For example, if you’re writing about the benefits of exercise, you could start with a startling statistic like, “Did you know that regular exercise can increase your lifespan by up to seven years?”
Avoid Using a Dictionary Definition : While definitions can be informative, they’re not always the most captivating way to start an essay. Instead, try to use a quote, anecdote, or provocative question to pique the reader’s interest. For instance, if you’re writing about freedom, you could begin with a quote from a famous freedom fighter or philosopher.
Do Not Just State a Fact That the Reader Already Knows : This ties back to the first point—your hook should surprise or intrigue the reader. For Here’s an introduction paragraph example, if you’re writing about climate change, you could start with a thought-provoking statement like, “Despite overwhelming evidence, many people still refuse to believe in the reality of climate change.”

Including background information in the introduction section of your essay is important to provide context and establish the relevance of your topic. When writing the background information, you can follow these steps:

Start with a General Statement:  Begin with a general statement about the topic and gradually narrow it down to your specific focus. For example, when discussing the impact of social media, you can begin by making a broad statement about social media and its widespread use in today’s society, as follows: “Social media has become an integral part of modern life, with billions of users worldwide.”
Define Key Terms : Define any key terms or concepts that may be unfamiliar to your readers but are essential for understanding your argument.
Provide Relevant Statistics:  Use statistics or facts to highlight the significance of the issue you’re discussing. For instance, “According to a report by Statista, the number of social media users is expected to reach 4.41 billion by 2025.”
Discuss the Evolution:  Mention previous research or studies that have been conducted on the topic, especially those that are relevant to your argument. Mention key milestones or developments that have shaped its current impact. You can also outline some of the major effects of social media. For example, you can briefly describe how social media has evolved, including positives such as increased connectivity and issues like cyberbullying and privacy concerns.
Transition to Your Thesis:  Use the background information to lead into your thesis statement, which should clearly state the main argument or purpose of your essay. For example, “Given its pervasive influence, it is crucial to examine the impact of social media on mental health.”

A thesis statement is a concise summary of the main point or claim of an essay, research paper, or other type of academic writing. It appears near the end of the introduction. Here’s how to write a thesis statement:

Identify the topic:  Start by identifying the topic of your essay. For example, if your essay is about the importance of exercise for overall health, your topic is “exercise.”
State your position:  Next, state your position or claim about the topic. This is the main argument or point you want to make. For example, if you believe that regular exercise is crucial for maintaining good health, your position could be: “Regular exercise is essential for maintaining good health.”
Support your position:  Provide a brief overview of the reasons or evidence that support your position. These will be the main points of your essay. For example, if you’re writing an essay about the importance of exercise, you could mention the physical health benefits, mental health benefits, and the role of exercise in disease prevention.
Make it specific:  Ensure your thesis statement clearly states what you will discuss in your essay. For example, instead of saying, “Exercise is good for you,” you could say, “Regular exercise, including cardiovascular and strength training, can improve overall health and reduce the risk of chronic diseases.”

Examples of essay introduction

Here are examples of essay introductions for different types of essays:

Argumentative Essay Introduction Example:

Topic: Should the voting age be lowered to 16?

“The question of whether the voting age should be lowered to 16 has sparked nationwide debate. While some argue that 16-year-olds lack the requisite maturity and knowledge to make informed decisions, others argue that doing so would imbue young people with agency and give them a voice in shaping their future.”

Expository Essay Introduction Example

Topic: The benefits of regular exercise

“In today’s fast-paced world, the importance of regular exercise cannot be overstated. From improving physical health to boosting mental well-being, the benefits of exercise are numerous and far-reaching. This essay will examine the various advantages of regular exercise and provide tips on incorporating it into your daily routine.”

Text: “To Kill a Mockingbird” by Harper Lee

“Harper Lee’s novel, ‘To Kill a Mockingbird,’ is a timeless classic that explores themes of racism, injustice, and morality in the American South. Through the eyes of young Scout Finch, the reader is taken on a journey that challenges societal norms and forces characters to confront their prejudices. This essay will analyze the novel’s use of symbolism, character development, and narrative structure to uncover its deeper meaning and relevance to contemporary society.”

Engaging and Relevant First Sentence : The opening sentence captures the reader’s attention and relates directly to the topic.
Background Information : Enough background information is introduced to provide context for the thesis statement.
Definition of Important Terms : Key terms or concepts that might be unfamiliar to the audience or are central to the argument are defined.
Clear Thesis Statement : The thesis statement presents the main point or argument of the essay.
Relevance to Main Body : Everything in the introduction directly relates to and sets up the discussion in the main body of the essay.

Writing a strong introduction is crucial for setting the tone and context of your essay. Here are the key takeaways for how to write essay introduction: 3

Hook the Reader : Start with an engaging hook to grab the reader’s attention. This could be a compelling question, a surprising fact, a relevant quote, or an anecdote.
Provide Background : Give a brief overview of the topic, setting the context and stage for the discussion.
Thesis Statement : State your thesis, which is the main argument or point of your essay. It should be concise, clear, and specific.
Preview the Structure : Outline the main points or arguments to help the reader understand the organization of your essay.
Keep it Concise : Avoid including unnecessary details or information not directly related to your thesis.
Revise and Edit : Revise your introduction to ensure clarity, coherence, and relevance. Check for grammar and spelling errors.
Seek Feedback : Get feedback from peers or instructors to improve your introduction further.

The purpose of an essay introduction is to give an overview of the topic, context, and main ideas of the essay. It is meant to engage the reader, establish the tone for the rest of the essay, and introduce the thesis statement or central argument.

An essay introduction typically ranges from 5-10% of the total word count. For example, in a 1,000-word essay, the introduction would be roughly 50-100 words. However, the length can vary depending on the complexity of the topic and the overall length of the essay.

An essay introduction is critical in engaging the reader and providing contextual information about the topic. To ensure its effectiveness, consider incorporating these key elements: a compelling hook, background information, a clear thesis statement, an outline of the essay’s scope, a smooth transition to the body, and optional signposting sentences.

The process of writing an essay introduction is not necessarily straightforward, but there are several strategies that can be employed to achieve this end. When experiencing difficulty initiating the process, consider the following techniques: begin with an anecdote, a quotation, an image, a question, or a startling fact to pique the reader’s interest. It may also be helpful to consider the five W’s of journalism: who, what, when, where, why, and how. For instance, an anecdotal opening could be structured as follows: “As I ascended the stage, momentarily blinded by the intense lights, I could sense the weight of a hundred eyes upon me, anticipating my next move. The topic of discussion was climate change, a subject I was passionate about, and it was my first public speaking event. Little did I know , that pivotal moment would not only alter my perspective but also chart my life’s course.”

Crafting a compelling thesis statement for your introduction paragraph is crucial to grab your reader’s attention. To achieve this, avoid using overused phrases such as “In this paper, I will write about” or “I will focus on” as they lack originality. Instead, strive to engage your reader by substantiating your stance or proposition with a “so what” clause. While writing your thesis statement, aim to be precise, succinct, and clear in conveying your main argument.

To create an effective essay introduction, ensure it is clear, engaging, relevant, and contains a concise thesis statement. It should transition smoothly into the essay and be long enough to cover necessary points but not become overwhelming. Seek feedback from peers or instructors to assess its effectiveness.

References

Cui, L. (2022). Unit 6 Essay Introduction.  Building Academic Writing Skills .
West, H., Malcolm, G., Keywood, S., & Hill, J. (2019). Writing a successful essay.  Journal of Geography in Higher Education ,  43 (4), 609-617.
Beavers, M. E., Thoune, D. L., & McBeth, M. (2023). Bibliographic Essay: Reading, Researching, Teaching, and Writing with Hooks: A Queer Literacy Sponsorship. College English, 85(3), 230-242.

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Introduction to Financial Statement Analysis
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