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What Are the Different Types of Financial Analysis Data?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 05 March 2020
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Financial analysis data is used by investors and analysts alike to determine the financial strength of a particular company, both in the present time and projected into the future. Most of this information can be gained from the income reports and balance sheets of the companies involved. Pertinent pieces of financial analysis data measure earnings, debt, assets, liabilities, cost of goods sold, and much more. These bits of data can then be compared to past numbers to spot trends or they can be used to calculate financial ratios, which allow comparisons between companies in the same industry.

The job of a financial analyst is to take all of the numbers associated with a certain company's finances and make reasonable inferences about that company's financial strength. These analysts have to decipher which pieces of information are the most relevant and how that information can be used to create a complete financial picture of a company. They use the various bits of financial analysis data available and turn it into something that can be easily understood by those inquiring about the company.

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Important financial analysis data that can be gained from balance sheets includes the amount of assets and liabilities that a company currently has. In addition, income reports can give an idea about a company's profitability by comparing the amount of revenue that a company earns in contrast to the cost it incurs while producing whatever it sells to consumers. Accounts payable and receivable, which are transactions that have not yet been completed but will ultimately affect a company's bottom line, can also be measured.

Other important financial analysis data pertains to the loans that a company takes out in the course of doing business. The amount of debt that a company currently has is crucial information, as is the amount of interest owed on that debt. Another big part of the financial picture of a publicly-traded stock company is how much earnings it makes compared to the market price of its stock.

These finite pieces of financial analysis data can then be used to create the more intricate metrics used to analyze a company's financial outlook. Financial ratios are especially important in this process, since they can be used to put the data in some sort of context. For example, if the amount of debt that a company owes compared to its cash flow is far below industry standards, it indicates a possible area of financial concern.

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MrMoody
Post 3

@miriam98 - I'm not a financial analyst, but there's one easy analysis of financial data that I can do which is a surefire indication of how the company is doing.

It's cash flow and burn rate. That's basic common sense. If you run out of money, you can't stay in business. I worked for a company that filed for bankruptcy twice, and in both cases, we saw that we were headed for trouble by looking at the cash flow.

We were even able to determine when we'd hit the wall, so to speak, by looking at the average monthly burn rate. I didn't need a degree in economics or business to figure that out.

miriam98
Post 2

@Charred - I disagree - not so much about debt, but the larger issue of ignoring one piece of data over another.

I remember when I invested in the stock market during the Internet bubble, many companies had high price to earnings ratios. A simple financial ratio analysis using those two factors, price and earnings, would have led to the conclusion that I should have avoided those companies.

Yet one analyst after another said that PE ratios don’t matter. They said the only important factor was strong growth and that over time the ratios would fall down to reasonable levels. Only a handful of analysts warned against companies with high PE ratios; these analysts encouraged investment in companies with low ratios.

Well, the rest is history. The Internet bubble exploded – lesson learned. I think we need to look at the whole picture of a company’s financial position, not just one piece of it.

Charred
Post 1

Personally, I believe that as long as a company can continue to service its debt, as well as generate cash flow and new sales, then the debt component should not be a major concern.

Many businesses need some kind of loan when they start out. You can call it a necessary evil, but debt in business doesn’t have the same stigma as personal debt for example. Businesses have more resources at their disposal to continue to service the debt – like liquidating assets if they have to.

The financial data analyst should mainly be concerned with sales growth and profit margins.

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