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Most popular financial analysis methods

Most popular financial analysis methods

Monday 31, 08 2020
In order to conduct analytical work, financial managers often use financial analysis softwares or professional analysis methods.

So, how many financial analysis methods are there and what are they? The answers lie in this article, which was written by VietnamCredit’s financial experts.

Comparative method

The comparative method is quite popular and widely used not only in financial analysis but also in the field of economic analysis. The comparison aims to highlight the differences and features of each business, through which it is possible to find out trends of market fluctuations. Entities or individuals can rely on the results to make the right choice.

Things to keep in mind when using comparative method

a/ Comparison of financial ratios: In order to study the ratios and make comparisons, it is necessary to ensure the consistency of the content in terms of economy, time, calculation method and measurement unit.

b/ Comparison base: The comparison base can be either time or space, depending on the purpose of the analyst.

- Time: The comparative base can be either the past periods or the plan and estimate.

  • When determining the trend and growth rate of an indicator, comparison base is its value in the previous period or in a series of previous periods. In this case, we will compare the mid-term values with the values in different base periods.

  • When assessing the position and competitiveness of an enterprise in the industry, it is necessary to compare the performance indicators of the business with the industry average, or with the performance indicators of competitors.

  • When performance of the tasks and objectives is evaluated, the comparison base will be the planned value of the indicator. So, we will need to compare the planned values with the actual values.

- Space: The comparison of space is the determination of a business’ position compared to its competitors, industry averages and regions. In this method of comparative financial analysis, we can exchange analysis points and analysis base but will not affect the analysis results.

c/ Forms of comparison

There are 2 forms of comparative method: relative comparison and absolute comparison.

- Relative comparison: Managers will understand the relationship, structure, fluctuation trend, development rate as well as the laws of fluctuations of economic indicators. There are several types of relative numbers that are often used by financial analysts.

- Absolute comparison: This comparison method reflects the scale of the analyzed indicator. Financial analysts can clearly see the fluctuation in the size of the mid-term analyzed indicator.

Most popular financial analysis methods

Method of division

This is one of the popular methods used by financial analysts. It is used as a tool to divide the process and results into specific parts. In financial analysis, it is common to detail derivative processes and the results of corporate financial activities through economic indicators according to:

- The constituent elements of the analyzed indicator: Detailed study into the components that make up the indicator.

- Time of process and business results: Break down the process and results in chronological order of arising and developing.

- Spatial space of business results: Break down the process and results according to the place of arising and developing of analyzed indicator.

Reconciliation method

This financial analysis method is used by financial analysts to examine and study the economic relationship between events and economic phenomena. When using this method, financial analysts need to pay attention to the stable and repetitive relationships, and the backwards, forward, partial balances.

Dupont method

Dupont's financial analysis method was invented by an American electrical engineer, the Financial Manager of the chemical company Dupont - F. Donaldson Brown. He used this method to study GM's basic financial ratios, restructure the planning system and control finance when after he had acquired 23% of General Motor Group's shares.

According to former President of GM - Alfred Sloan, GM's later success was largely contributed by Brown's financial planning and control system. The Dupont method has since become popular and used by many large corporations in the United States. So far, it has been used in most corporate financial operations.

The Dupont method based on controlling financial indicators is quite complicated. Each indicator reflects the financial relationship in the form of ratios. Each financial ratio is influenced by the financial relations of the enterprise with related parties.

Advantages:

- The Dupont method is simple, providing managers with basic knowledge and effective solutions to use capital.

- Easily connect to the financial policies of the business.

- Can be used when trying to convince managers and investors, helping them better see the financial situation of the business.

Disadvantages:

The Dupont method is quite dependent on the reliability of the input data. If the input data is incorrect, it will have a chain effect on the whole business.

Steps to implement the Dupont method:

- Collect data from financial statements.

- Calculate using spreadsheets.

- Explain the changes of ROA, ROE ...

- Examine the correctness; check data and recalculate if needed.

The above are 4 methods of financial analysis that are commonly used in most businesses. Besides, there are still many other financial analysis methods such as predictive method, factor analysis method, scoring method, empirical method, linear planning method, econometric model, etc. Depending on the situation of each business as well as the demand, financial statements analysts choose different methods. However, whatever the method is, their ultimate goal is the outcome. Please drop an email to [email protected] if you need any assistance.

>> Types of Financial Statements and their significance

Alice Hoang Thao - VietnamCredit

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