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What Is Corporate Financial Analysis?

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  • Written By: Terry Masters
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 19 September 2016
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Corporate financial analysis is a quantitative method of evaluating a company's financial position and the market value of its stock. It is based on the audited financial reports that every public company is required to publish annually to comply with regulatory obligations. Financial analysts use this method to assess the performance of portfolios and to make investment recommendations. Students in university business programs also use corporate financial analysis to produce case studies for discussion in the classroom.

Analysis of a corporation's financial position is concerned with profitability, liquidity, and valuation. It uses the corporation's financial statements to evaluate the company, including the balance sheet, income statement, cash flow statement, and statement of owners equity. There are various ways to reach conclusions about a company, but certain quantitative methods and standard computations are considered core elements of this type of work. Anyone who wants to function as a professional investment advisor needs to be conversant in at least five areas of financial review.

Profitability analysis is a key component of corporate financial analysis. It is concerned with computations that reflect price to earnings ratios. Liquidity and capital structure are reviewed together as another area of analysis. The review of this part of a corporation's financial affairs is primarily concerned with various debt ratios. Valuation is the third major topic within corporate financial analysis, and is computed through the use of discounted cash flow scenarios.

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Different sorts of financial modeling make up the fourth and fifth main topics of corporate financial analysis. Modeling to forecast sales earnings is part of valuing the company's stock. Portfolio modeling analyzes a corporation's place in a healthy investment strategy. Once a financial analyst completes his review of the company, he uses it to make recommendations to investors regarding the suitability of the stock as an investment. Some of the larger investment firms frequently publish their analysis, which serves as a major source of research literature for other investors.

Corporate financial analysis can also be used in an academic environment as part of the development of theory. In this instance, the analysis has a common written format that students use to present information and conclusions. The case study will typically address a corporation's governance, capital structure, risk profile, investment return, dividend policy, and valuation. Throughout the study, the student applies the same quantitative methods and computations as a professional financial analyst to reach conclusions about the corporation, such as comparing the current capital structure to an optimized structure or assessing the costs of moving in the direction of the optimal scenario.

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