Data is the oil of the future. From here we can understand well the importance of data in general and financial data specifically for companies and institutions that possess huge amounts of financial data and numbers that multiply over the years. However, this data may become a huge burden on the organization and become worthless if it is not analyzed properly. Here comes the role of financial analysis of various financial data, and from here we can also understand the importance of financial analysis for any institution, business and commercial activity.

During this article, we will explain to you the concept of financial analysis precisely, and what are the known types of financial analysis used by financial accountants around the world.

What is the concept of financial analysis?
Financial analysis means the process of evaluating the financial position and performance of an organization or business and projects in general based on a study of its available financial data, such as financial statements (income statement, balance sheet, and cash flow statement); With the aim of producing accurate and significant information that can be used to form a clear vision of the financial situation and financial performance, determine the current and future value of the institution, and other valuable information that helps decision-makers, whether investors, governments, or owners, make informed financial and administrative decisions.

This, very briefly, is the concept of financial analysis of the financial data of various companies, institutions, activities, and businesses.

But, are there specific types or methods of financial analysis?🤔 This is what we will answer in the next paragraph, let’s find out!

What are the types of financial analysis?
Financial ratio analysis
trend analysis
Comparative analysis
Cash flow analysis
Horizontal analysis
Vertical analysis
Risk analysis
Financial analysis includes several main types that can be divided as follows:

1. Financial ratio analysis
Financial ratio analysis is based on a main set of factors and indicators in order to reach an accurate assessment of the company's financial performance, financial health and position compared to competing companies in the same market and industry. The most prominent of these financial ratios are the profitability ratio, liquidity ratio, debt ratio, efficiency ratio, and financial leverage ratio. The following is an explanation of the most important of these financial ratios:

Liquidity ratios: such as the current ratio and the quick ratio, which measure the company's ability to meet its short-term obligations.

Profitability ratios: such as net profit margin and return on assets, which measure the company's ability to achieve profits.

Efficiency ratios: such as the asset turnover ratio, which measures the efficiency of using assets.

Financial leverage ratios: such as the debt to equity ratio, which measures the extent to which the company uses debt financing.

2. Trend analysis
Trend analysis is one of the most prominent types of financial data analysis, as it mainly aims to identify trends in financial performance and financial development within the organization through analyzing and studying financial data over certain periods of time.

Trend analysis effectively helps determine the level of stability and development in the organization's financial performance.

3. Comparative analysis

Comparative analysis is one of the important and somewhat difficult types of financial analysis. Because it depends on financial data of other competing companies, you may not have this information easily.

From this we understand that comparative analysis is essentially based on comparing the company's financial performance with other competing companies in the same industry and the same market, or comparison based on standard standards for the same industry.

The main goal of this type of financial analysis is to identify the organization's strengths and weaknesses, as well as to reach areas that can be developed to improve the company's financial performance.

4. Cash flow analysis
Cash flow analysis is one of the most dangerous financial analyzes for institutions and companies. Because it gives us a clear vision of the financial sustainability of the organization as a whole.

Cash flow analysis mainly aims to understand how cash flows are generated within the company, the extent of its ability to generate them, and how it can use and manage these flows effectively in operational, investment, financing and other activities.

5. Horizontal financial analysis
Horizontal analysis is based on analyzing the financial statements and comparing the financial items of the institution over different periods of time with the aim of determining the percentage of change for each financial item of the institution as a whole.

6. Vertical financial analysis
As for the vertical financial analysis, it is different, as it is based on analyzing the financial statements as a percentage of a basic amount in the same financial period, such as analyzing the components of the income statement as a percentage of net sales.

7. Risk analysis

Risk analysis is one of the most important types of financial analysis; Because it strongly affects the plans and strategies of institutions over the years.

This type aims to identify the financial risks facing the institution and evaluate them in order to discover potential financial challenges and develop effective plans to deal with them in a way that does not have a strong impact on the institution’s performance.

💡These were the most important types of financial analysis of financial data within various institutions and companies, through which one can evaluate the financial situation, accurately determine the financial performance of the institution, and know its financial trends.