Horizontal Analysis
The strategic financial analysis report has been prepared to investigate over the various techniques and tools which are useful for the company to make a better decision about the position and the performance of the company in concern of the competitors and the last year performance. Financial analysis is a study which is performed by the analysis, investors and the management of the company to analyze the stability position, profitability position, and financial position etc of a company.
Various tools and methods are variable to evaluate the financial analysis of a company such as ratio analysis, vertical analysis, horizontal analysis etc. In this report, the main concern has been shown over the traditional methods and contemporary method of financial analysis and it has been evaluated that how both of these methods work and how does it assist the comapny to make a better decision about the position and the performance of the company.
For traditional methods, ratio analysis, vertical analysis and horizontal analysis has been evaluated and for the contemporary methods, CAPM model, Dividend growth model and effective market hypothesise has been taken into the concern. These report briefs that how effective these analyses could be in evaluating the performance of a company.
Horizontal analysis is a form of analyzing the financial statement of the company on the basis of last year or month’s performance. In this analysis, an analyst could compare the performance of a month with the last month’s performance or a fiscal year. For instance, an organization has generated different revenues in different year than it could be compared through the horizontal analysis and it could be found that whether the revenues have been enhanced or it has been reduced from the last year (Jiashu, 2009).
Gapenski, (2008) has depicted in his study that horizontal analysis is one of the best technique to analyze the performance of a company. Further, it has been added by Dixon and Monk, (2009) that it is one of the simple technique to analyze the performance and the changes into the organization in a particular year. Zimmerman and Yahya-Zadeh, (2011) has briefed that the method assists the managers to make a better decision about the performance of the company.
Shortcomings
The major limitation of the horizontal analysis method is that it analyzes the financial performance through examining the changes in terms of percentage in current year in the context of base year. This could provide manipulated financial information if the worst year of performance is selected as the base year and thus the decision making would also not be fair. According to the study of the Voelkl and Fritz, (2017), it has been found that the horizontal analysis manipulates the result and it do not offer the knowledge that why the changes have taken place and what are the main reasons behind these changes. Ward (2012) adds that it is a complex task to analyze and evaluate the base year for the study.
Shortcomings
Illustration of the Example through the use of Financial Data of the Selected Companies
The horizontal analysis of both the companies are performed in excel and is presented in Appendix I. On the basis of overall horizontal trend analysis of Admiral Company it can be said that there has been decreasing trend in various financial items of the income statements. There was increasing trend in the current assets of the Admiral Company whereas there was decreasing trend in case of Amec Company.
Vertical analysis is a form of analyzing the financial statement of the company on the basis of various categories such as sales, assets, liabilities, cash flow etc. In this analysis, an analyst could compare the performance of a category according to the base category such as in balance sheet, the figures must be compared according to their base figure i.e. assets, liabilities and the total equity of the company. For instance, two or more companies of the same industry have been analyzed and the analysis has been done according to their net profit on the basis of their sales (Oliver and Schoff, 2017).
Madura (2014) has depicted in his study that vertical analysis is one of the best technique to analyze the performance of a company and compare the company with other companies in the same industry. Further, it has been added by Lacalle (2017) that it is one of the simple technique to analyze the comparative study and the performance of the company. Kaplan and Atkinson, (2015) has briefed that due to this technology, it becomes easy for the investors to analyze the different companies and make a better decision about the performance and the position of a company (Horngren, 2009). This analysis study helps the analyst and financial managers to identify the position and reach over a good decision.
Shortcomings
Schlichting, (2013) stated that the major limitation of the method is that it evaluates the financial performance of a company on the basis of current year performance. Thus, the results obtained are less reliable as it does not take into account the previous year performances of the companies. According to the study of the Phillips and Stawarski, (2016), it has been found that the vertical analysis takes a lot of time to reach over a final conclusion and it also makes the financial figures complex.
Illustration of the Example through the use of Financial Data of the Selected Companies
Illustration of the Example through the use of Financial Data of the Selected Companies
The vertical analysis of the Admiral and Amec Companies are shown in Appendix II. As per the analysis it can be said that Admiral Company has increasing trend in all the items of the income statements as well as in the items of the balance sheet. On the other hand there was decreasing trend in the financial items of income statement of Amec for last five years but there was decreasing trend in balance sheet items. The gross profit of the Admiral Company ranges 58% to 74% in last five years that depicts very strong financial position of the Admiral Company. Whereas there was 12% to 15% gross profit in case of Amec Company in last five years.
Traditional ratio analysis is a form of analyzing the financial statement of the company on the basis of various categories such as liquidity position, solvency position, profitability position, efficiency position etc. In this analysis, an analyst could compare the performance of a company according to the various categories such as in profitability position, the net profit of the company could be compared with the total sales of the company (Krantz, 2016). Traditional Ratios of the both the selected companies are shown in Appendix III.
Kinsky, (2011) has depicted in his study that ratio analysis is one of the oldest technique to analyze the performance of a company. Further, it has been added by Elton et al, (2009) that it is one of the simple techniques to analyze the position of the company in various terms. Baker and Nofsinger, (2010) has briefed that due to this analysis method, it becomes easy for the investors to analyze the position of the company and make an investment decision (Ackert and Deaves, 2009).
Further, it has been found that there are various shortcomings of the ratio analysis. Higgins, (2012) depicted that this analysis does not take a concern about the historical data. According to the study of the Glajnaric, (2016), it has been found that the ratio analysis study do not take a concern about various economical condition such as inflation rate to make a decision about the performance and changes into the company. It misleads the result of the financial analysis and thus it becomes tough for the organization to manage and make a better decision about the betterment of the company.
The liquidity ratio analysis of the companies is evaluated through the use of current and quick ratio. The current ratio determines the relation between the current assets and liabilities while quick ratio determines the ability to meet the liabilities from the most liquid resources. The current and quick ratio of Admiral shows an increasing trend whereas that of Amec shows a decreasing trend.
Vertical Analysis
The efficiency ratios measure the ability of a company to effectively use its assets and liabilities. The efficiency of both the companies to collect accounts receivables, selling inventory and meeting its payables have shown an increasing trend whereas their abilities to generate cash from the asset resources have shown a negative growth rate.
The analysis of the profitability position of the companies on the basis of gross profit, net profit, return on equity and return on assets have shown an increasing trend for Admiral whereas that of Amec have shown a negative growth rate.
Cash Flow Ratios
The cash flow ratios such as operating cash flow to sales and to net income have shown an increasing trend for Admiral whereas shows a negative growth rate for Amec. It depicts that operating cash flow position of Admiral is much better that that of Amec.Leverage Ratios
The leverage ratio of debt to equity and debt to assets for both the companies shows an increasing trend depicting that both the companies are utilizing larger proportion of debt in the capital structure as compared to equity.
Capital asset pricing model is the modern method to identify and analyze the financial condition of a company. According to this study, it has been found that this model assist the investors to analyze the total return which is required while investing into the company. This method mainly focuses over the risk factor and the return factor. This model depict that the return from an investment must be equal or more than the cost of capital of the company than only it would be profitable for the company (Zabarankin, Pavlikov and Uryasev, 2014).
Tian & Jiang, (2015) has depicted in his study that capital asset pricing method is one of the best technique to analyze the performance of the stock of a company. Further, it has been added by Seitzinger et al, (2010) that this study do not only take the concern of the internal figures such as ratio analysis do rather it takes a concern of the economy and market condition and make a better decision on the basis of that. Ross, Westerfield and Jaffe, (2008) has briefed that this modern analysis has made it very easy for the investors to analyze the total return which must be expected from a company while investing into the shares and debt of the company (Reilly and Brown, 2011).
Further, it has been found that still few changes are required to done in the capital asset pricing model to make it better. Peterson and Fabozzi, (2002) depicted that the CAPM model takes a concern of the risk free rate. Risk free rate is the yield over the government securities which changes on the daily basis. According to the study of the Moles, Parrino and Kidwekk, (2011), it has been found that the CAPM has built over four assumptions which also include an unrealistic world picture. Lumby & Jones, (2007) adds that it is a complex task to analyze and evaluate the beta of the company. Mainly, this model concerns about a proxy data and thus the outcome is unrealistic (Lee and Lee, 2006). Thus it becomes tough for the investors and the analyst to make a better decision about the investment decisions.
Shortcomings
Advantage of Method over Traditional Financial Analysis
Higgins (2012) stated that the main advantage of this method over the traditional analysis techniques is that it helps in evaluating the inherent risk level in an investment for a potential investor. The traditional method of financial analysis is not helpful in determining the risk level of an investment. Also, the traditional method of analysis evaluates the performance of a company on the basis of historical data and therefore not helpful in predicting its future financial growth. However, the CAPM model has overcome this shortcoming of the traditional financial analysis method as it predicts the future performance of the company on the basis of its current financial performance (Higgins, 2012).
Dividend growth model is also known as Gordon growth model. According to this study, it has been found that this model assist the investors to analyze the value of the expected dividends in the future. This method mainly focuses over the time value of money (Damodaran, 2011). This model analyzes the current market price and future dividend of a company and makes a decision about the investment in the company according to that. Investors could take the help of dividend growth model in evaluating and analyzing the intrinsic value of a company’s stock.
Batra and Verma (2004) has depicted in his study that dividend growth method is one of the new and modern technique to analyze the performance and the worth of the stock of a company. Further, it has been added by Barlow, (2006) that this study evaluates the worth of the stock price of a company which also takes the concern of the market condition so that the comparison of the company could be easy with the competitors and industry. Fulin (2011) has briefed that this modern analysis has made it very easy for the investors to analyze the total worth of the equity of the company so that the best value could be recognized and the decision could be made according to that (FIRRER et al, 2012). This analysis study helps the analyst and financial managers to identify the position and reach over a good decision.
Further, it has been found that still few changes are required to done in the dividend growth model to make it better. Elmuti and Kathawala, (2001) depicted that the dividend growth model do not takes a concern of the non dividend factor like brand loyalty. Customer retention and intangible assets are also not recognized by this method, but these values enhance the worth of the business. According to the study of the Du and Girma, (2009), it has been found that the dividend growth model mainly express that the growth rate of the dividend of a company always stables and known but in reality, it fluctuates rapidly. Deegan (2013) adds that it is a complex task to analyze and evaluate the intrinsic value of the stock of a company. Mainly, this model concerns about a proxy data and thus the outcome is unrealistic (Davies and Crawford, 2011). Thus it becomes tough for the investors and the analyst to make a better decision about the investment and divestment from the company. Lastly, it has been found that dividend growth model analysis is a good technique to analyze the worth of the company.
Illustration of the Example through the use of Financial Data of the Selected Companies
Advantage of Method over Traditional Financial Analysis
As per Reilly & Brown (2011), the method determines the intrinsic value of a company on the basis of the dividend yield and therefore most beneficial method for the shareholders to predict the worth of their investment. There is no specific traditional method of analysis specially meant for supporting the shareholder’s investment decisions. In addition to this, the method is also largely helpful for comparing the performances of the companies across different industries and having different sizes. The traditional method of analysis mainly helps in providing a comparison of the financial performances of the companies belonging to same industry and having relatively similar sizes (Reilly & Brown, 2011).
As per the EMH theory it is not easy for the inventors to beat the market as the market efficiency of the security market causes the already existed share prices to incorporate and express all the relevant information. This analysis depict that the security market always deals of the stock on their fair value so that it becomes impossible for the investors to buy the stock in lower prices (Davies and Crawford, 2011). This rule could be applied over a single security. Investors could take the help of EMH in evaluating and analyzing the market position. This method is mainly used by the investors to analyze the worth of a company. The EMH theory performs according to the 3 division of a result which is strong, semi strong and weak. This formula depict that for analyzing the worth of a company, it is required for the investor to analyze the various economical and market position as well as the policies and the strategies of the company (CORRERIA et al, 2013).
Bui et al, (2016) has depicted in his study that effective market hypothesis is one of the new and modern technique to analyze the performance and the worth of the company. Further, it has been added by Bromwich and Bhimani, (2005) that this study evaluates the worth of a company and for which they also takes the concern of the market condition so that the comparison of the company could be easy with the competitors and industry. Brigham and Michael (2013) has briefed that this modern analysis has made it very easy for the investors to analyze the total worth of the company so that the best value could be recognized and the decision could be made according to that (Brigham and Houston, 2012). This analysis study helps the analyst and financial managers to identify the position and reach over a good decision.
Traditional Ratio Analysis
Further, it has been found that still few changes are required to done in the effective market hypothesis theory to make it better. Brealey et al, (2007) depicted that the EMH do not takes a concern of the various important factors. According to the study of the Borio (2014), it has been found that the EMH theory is based over various assumptions. Amold (2013) adds that it is a complex task to analyze and evaluate the worth of a company. Mainly, this model concerns about a proxy data and thus the outcome is unrealistic (Brigham and Ehrhardt, 2013). Thus it becomes tough for the investors and the analyst to make a better decision about the investment and divestment from the company.
Advantage of Method over Traditional Financial Analysis
Damodaran (2011) stated that the method is largely helpful in providing an analysis of the market conditions and their impact on the stock performances. The traditional method of financial analysis is not helpful in predicting the stock movements on the basis of the changes occurring in the market conditions. The method determines the fair value of a stock that is not possible with the help of traditional analysis method techniques (Damodaran, 2011).
Conclusion
To conclude, horizontal analysis is used to evaluate the performance of the company on the context of last year. Further, vertical analysis and ratio analysis is used to evaluate the performance of the company with the industry position and on the basis of various positions respectively. More, the modern technologies depict that the CAPM method helps the investors to analyze the return from the investment. Dividend growth model helps the company to analyze the worth of the security and EMH helps in analyzing the worth of a company. The best financial analysis method is EMH theory as it takes a concern of the entire relevant factor and depicts a good result.
References
Ackert, L. and Deaves, R. 2009. Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage Learning.
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and Markets. John Wiley & Sons.
Batra, R. & Verma, S. 2014, “An Empirical Insight into Different Stages of Capital Budgeting”, Global Business Review, vol. 15, no. 2, pp. 339-362.
Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.
Shortcomings
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.
Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.
Bui, S.B.D., Petersen, T., Poulsen, J.N. and Gazerani, P., 2016. Headaches attributed to airplane travel: a Danish survey. The journal of headache and pain, 17(1), p.33.
CORREIA, C. et al. 2013. Financial Management. 7th Edition. Cape Town: Juta andCompany Ltd.2.
Damodaran, A, 2011, Applied corporate finance,3rd edition, John Wiley & sons, USA
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Dixon, A.D. and Monk, A.H., 2009. The power of finance: accounting harmonization’s effect on pension provision. Journal of Economic Geography, 9(5), pp.619-639.
Du, J. and Girma, S., 2009. Source of finance, growth and firm size: evidence from China (No. 2009.03). Research paper/UNU-WIDER.
Elmuti, D. & Kathawala, Y. 2001. “An overview of strategic alliances”. Management Decision, vol. 39, no. 3, pp. 205-217.
Elton, E.J., Gruber, M.J., Brown, S.J., and Goetzmann, W.N. 2009. Modern Portfolio Theory and Investment Analysis. John Wiley & Sons.
FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition.Berkshire.McGraw-Hill Companies, Inc.
Fulin, S. 2011. Preface by SHANG Fulin. Corporate Governance of Listed Companies in Barlow.J.F.,2006, Excel models for business and operations management, 2nd edition, John Wiley & sons ltd, England
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.
Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of financial accounting [J]. Accounting Research, 5, p.003.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley & Sons.
Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.
Lacalle, D., Credit?rating agencies. Life in the Financial Markets: How they really work and why they matter to you, pp.95-98.
Lee.C.F & Lee, A, C,.2006,Encyclopedia of finance, Springer science, new York
Lumby,S & Jones,C,.2007, Corporate finance theory & practice, 7th edition, Thomson, London
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Moles, P. Parrino, R & Kidwekk, D,.2011, Corporate finance, European edition, John Wiley &sons, United Kingdom
Oliver, J. and Schoff, P., 2017. Agency and Competition Law in Australia Following ACCC v Flight Centre Travel Group. Journal of European Competition Law & Practice, 8(5), pp.321-328.
Peterson, P,P & Fabozzi,F,J,. 2002, Capital budgeting: theory and practice, John Wiley & sons, Canada
Phillips, P.P. and Stawarski, C.A. 2016. Data Collection: Planning for and Collecting All Types of Data. John Wiley & Sons.
Reilly.F.K & Brown.K.C,.2011,Investment analysis & portfolio management,10th edition, South western Cengage learning, India
Ross, A,. Westerfield, R,W,. Jaffe,J,.& Kakani,R,K,.2008, Corporate Finance, 8th edition,
Schlichting, T. 2013. Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag.
Seitzinger, S.P., Mayorga, E., Bouwman, A.F., Kroeze, C., Beusen, A.H.W., Billen, G., cht, v., G, Dumont, E.L., Fekete, B.M., Garnier, J. & Harrison, J. 2010, “Global River Nutrient Export: A Scenario Analysis of Past and Future Trends”, Global Biogeochemical Cycles, vol. 24, pp. GB0A08-GB0A08.
Tian, D. & Jiang, L. 2015, “Quasiconvex risk statistics with scenario analysis”, Mathematics and Financial Economics, vol. 9, no. 2, pp. 111-121.
Voelkl, B. and Fritz, J., 2017. Relation between travel strategy and social organization of migrating birds with special consideration of formation flight in the northern bald ibis. Phil. Trans. R. Soc. B, 372(1727), p.20160235.
Ward, K., 2012. Strategic management accounting. Routledge.
Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.
Zabarankin, M., Pavlikov, K. & Uryasev, S. 2014, “Capital Asset Pricing Model with drawdown measure”, European Journal of Operational Research, vol. 234, no. 2, pp. 508.China, 9-10.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
