Financial Analytics: How to Properly Assess a Company’s Financial Health
What is Financial Analytics and Financial Analysis?
Financial analytics is the systematic study of a company’s financial data aimed at assessing its current condition and forecasting future performance. It relies on accounting data, financial statements, and statistical indicators. Analytics helps executives and business owners see the true picture of operations, respond to risks in time, and make decisions based on facts rather than intuition.
Financial analysis is a component of financial analytics that uses various methods and indicators to evaluate a company’s activities quantitatively. According to the Law of Ukraine “On Accounting and Financial Reporting in Ukraine” No. 996-XIV and the National Accounting Standard (NAS) No. 1 “General Requirements for Financial Statements,” financial statements are the primary source for such analysis.
Thanks to analytics, a company can:
- assess the efficiency of capital use;
- identify liquidity or profitability issues;
- plan future cash flows;
- forecast the outcomes of management decisions.
In other words, financial analysis is a tool that turns financial figures into actionable managerial insights.
Purpose and Objectives of Financial Analysis
The purpose of financial analysis is to objectively assess a company’s financial position, performance efficiency, and growth potential. Based on the results, management develops a strategy for managing assets, liabilities, and capital.
Key objectives include:
- Profitability assessment – determining the company’s ability to generate profit relative to its resources and expenses. Indicators such as ROA, ROE, and ROS show how effectively capital is being used.
- Liquidity assessment – determining the company’s ability to meet short-term obligations. High liquidity indicates stability.
- Financial stability assessment – understanding the ratio of equity to debt, which reflects how independent the company is from external creditors.
Results of financial analysis are essential for:
- owners – to control business profitability;
- investors – to assess investment risks;
- creditors – to evaluate repayment probability;
- management – to adjust financial policy;
- auditors and regulators – to verify the accuracy of reporting.
Key Financial Health Indicators
To assess a company’s financial position, analysts use key ratios that reflect liquidity, solvency, profitability, and asset turnover.
1. Liquidity Ratio
Shows how well a company can cover its short-term liabilities with current assets.
Formula:
Current Ratio = Current Assets / Current Liabilities
Standard value: 1.0–2.0
If it’s lower than 1.0, the company may have difficulties paying its bills; if it’s higher than 2.0, funds may be used inefficiently.
2. Equity Ratio (Financial Independence)
Indicates the proportion of equity in the total asset structure.
Formula:
Equity Ratio = Equity / Total Assets
Optimal value: not less than 0.5, meaning at least half of the company’s assets are financed by its own funds.
3. Return on Assets (ROA)
Shows how much profit each unit of assets generates.
Formula:
ROA = (Net Profit / Average Total Assets) × 100%
A higher ratio indicates efficient asset management.
4. Return on Equity (ROE)
Measures how effectively shareholders’ invested capital is used.
Formula:
ROE = (Net Profit / Equity) × 100%
This is a key indicator for investors – the higher it is, the more profitable the investment.
5. Solvency Ratio
Reflects the company’s ability to repay all its obligations in the event of liquidation.
Formula:
Solvency Ratio = Equity / Total Liabilities
Recommended value: 1.0 or higher.
6. Capital Turnover Ratio
Shows how efficiently a company converts invested resources into revenue.
Formula:
Capital Turnover = Revenue / Average Total Assets
The faster the capital turnover, the higher the company’s efficiency.
Methods and Types of Financial Analysis
In practice, several analysis methods are used:
- Horizontal analysis – compares financial indicators over several periods to assess growth dynamics.
- Vertical analysis – studies the internal structure of assets and liabilities within one period.
- Comparative (benchmark) analysis – compares performance with industry averages or competitors.
- Factor analysis – identifies how individual factors (price, cost, volume) affect results.
- Ratio analysis – uses a system of ratios to evaluate stability, liquidity, and profitability.
- Integrated analysis – combines several indicators into one general evaluation used by investors or auditors.
Using a mix of methods gives the most complete picture of a company’s financial health.
How to Conduct Financial Analysis: Step-by-Step Guide
Step 1. Collect Financial Statements
Prepare the main documents:
- Balance Sheet (Form No. 1)
- Income Statement (Form No. 2)
- Cash Flow Statement (Form No. 3)
These forms are regulated by the Order of the Ministry of Finance of Ukraine No. 73 dated February 7, 2013.
Step 2. Analyze the Structure of Assets and Liabilities
Determine which portion of assets is current and which is non-current; assess the amount of borrowed funds used and how the balance between owned and borrowed resources changes over time.
Step 3. Calculate Key Financial Ratios
Use the provided formulas to evaluate liquidity, autonomy, profitability, and solvency. Compare the results with industry benchmarks.
Step 4. Compare with Previous Periods
Analyzing the dynamics of indicators helps identify trends – whether profit is increasing, debt burden is decreasing, or capital turnover is improving.
Step 5. Develop Conclusions and Recommendations
Based on the analysis, specific actions are formulated, such as:
- optimizing expenses;
- reducing accounts receivable;
- improving asset efficiency;
- planning the budget for the next period.
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Example: Financial Analysis of a Company
Let’s review a brief example of financial analysis to see how the indicators work in practice.
Initial data (thousand UAH):
- Current assets – 600
- Non-current assets – 400
- Current liabilities – 300
- Long-term liabilities – 200
- Equity – 500
- Revenue – 2,000
- Net profit – 150
Calculations:
- Liquidity Ratio = 600 / 300 = 2.0
- Equity Ratio = 500 / (600 + 400) = 0.5
- Return on Assets (ROA) = 150 / 1,000 × 100% = 15%
- Return on Equity (ROE) = 150 / 500 × 100% = 30%
- Solvency Ratio = 500 / (300 + 200) = 1.0
- Capital Turnover Ratio = 2,000 / 1,000 = 2.0
Explanation:
The company demonstrates a sufficient level of liquidity, stable solvency, and above-average profitability. Such results indicate effective asset utilization and a balanced capital structure. In the future, profit can be increased by accelerating cash turnover or optimizing expenses.
Common Mistakes in Financial Analysis
- Using incomplete data. If financial reports lack key indicators or contain inaccuracies, conclusions will be misleading. All calculations must be based on verified data in accordance with NAS (National Accounting Standards) No. 1–3.
- Ignoring external factors. Financial results may depend on exchange rate fluctuations, inflation, tax changes, or overall market conditions. Analysis should always consider macroeconomic trends.
- Misinterpreting ratios. For instance, a high liquidity ratio doesn’t always indicate efficiency–it might signal excessive accumulation of cash or inventory.
- Lack of dynamic analysis. Comparing data from only one reporting period doesn’t reveal trends. It’s important to analyze dynamics over at least 3–5 years.
- Disregarding industry benchmarks. Profitability and turnover standards vary across industries such as manufacturing, trade, and IT, so these differences must be taken into account.
- Ignoring qualitative factors. Financial analytics should combine quantitative indicators with qualitative aspects, such as customer satisfaction levels or supplier stability.
Conclusion
Financial analytics is the foundation of effective business management. It enables companies not only to assess their current condition but also to forecast development, manage risks, and make strategic decisions.
Financial analysis helps identify real growth opportunities, ensure financial stability, and build investor confidence.
Regular financial assessment is key to maintaining profitability, solvency, and competitiveness in the market.
FAQ
What is financial analytics in simple terms?
Financial analytics is the process of studying a company’s financial indicators (income, expenses, assets, liabilities) to understand how it operates, where issues exist, and how to improve performance.
How often should financial analysis be conducted?
A basic financial analysis should be done quarterly, while a full analysis – at least once a year or before seeking investment, financing, or scaling the business.
How does financial analytics help in decision-making?
It provides a real picture of the company’s situation, identifies profitable and unprofitable areas, optimizes costs, and helps build a data-driven development strategy rather than relying on assumptions.
What does the liquidity ratio mean?
The liquidity ratio shows whether a company can pay its short-term debts on time. If it’s below 1, this signals a lack of current assets to cover liabilities.
How to calculate profitability?
Profitability shows how much profit a company earns from each monetary unit of revenue.
Formula: Profitability = (Net Profit / Revenue) × 100%.