Enhance The Effectiveness Of Financial Analysis.

Financial analysis is a very difficult task. It involves a wide range of, uncertain, and much needed knowledge (such as accounting, finance, economics, strategic management, securities market, law, etc.), and also has a strong "artistry".

Therefore, sometimes it is not easy to reach a complete agreement.

When considering effective financial analysis mode, we should not only see the importance of economic and industrial analysis in assessing the future development of enterprises, but also see the significance and limitations of financial statements, and avoid blind use of financial ratios and relevant analysis indicators as far as possible.

To this end, this paper argues that effective financial analysis must include the following five interrelated steps:

Can financial analysis be completely resolved within the corporate scope?

Because the relationship between financial statements and the financial characteristics of enterprises can not be separated from the analysis of the characteristics of the industrial economy. In other words, the same financial statements are placed in different industries, and the economic significance and financial characteristics of them are quite different. For example, the retail industry, the steel industry and the real estate industry have very different financial ratios. For example, the high-tech industry and the traditional industry are not only very different in the characteristics of the industrial economy, but also the factors determining their competitive position are also different.

In financial analysis, the characteristics of industrial economy is a very important analysis basis. Only when we understand and determine the economic characteristics of a particular industry, can we truly understand the economic significance of financial statements and give play to the role of financial analysis in management decisions.

Lacking the assurance of the economic characteristics of the industry, it means that the financial analysts of the enterprise isolate themselves in a small circle, and do not know the environment, the industrial development prospects, the influence and the competitive position of the enterprises.

In practical work, there are many patterns of identifying the economic characteristics of the industry (or even the enterprises). The most commonly used models are economic attributes of the five levels, which include demand, supply, production, marketing and finance. These five aspects include:

Among them, the demand attributes reflect the sensitivity of customers to the prices of products or services. The growth rate, the sensitivity to business cycle and the seasonal impact are important factors to assess demand.

Supply attributes refer to the characteristics of products or services in terms of supply.

In some industries, the products or services provided by many suppliers are very similar, while in other industries there are very few suppliers.

People usually judge supply with the difficulty of industrial entry. In terms of production attributes, some enterprises are purely labor-intensive, while others are capital intensive. When analyzing production attributes, the complexity of manufacturing process is also an important criterion.

The marketing attribute of an industry involves consumers and distribution channels of products and services. Some industries are particularly hard to sell, while others are much easier to sell.

The key to identify financial attributes is to define the level and type of liabilities that match the asset structure and product characteristics of a company. For those mature and profitable companies, their external borrowing is generally less than that of newly established companies.

In addition, some industries are generally unable to bear high levels of external liabilities because of their short life expectancy (such as personal computer manufacturing) or long-term development prospects (such as traditional steel manufacturing) and high risks.

Determining the economic characteristics of an industry is the first step in effective financial analysis.

Through the determination of the characteristics of the industrial economy, on the one hand, it provides a "navigation mark" for understanding the economic significance of financial statement data; on the other hand, it shortens the distance between financial ratios and related indicators and management decisions, making the information of financial analysis more meaningful to management decisions.

Financial analysis is closely related to enterprise strategy. If the characteristics of industrial economy are the "AIDS" for financial analysts to understand the economic significance of financial statements, corporate strategy is a specific guide for financial analysts to make relevant evaluation for management decisions in financial analysis.

Without financial strategy, financial analysis will lose its way. Financial analysis can not really help management decisions to make scientific assessments.

Therefore, in the effective financial analysis mode, followed by the analysis of the characteristics of the industrial economy, we must define the enterprise strategy.

The reason why an enterprise wants to establish its strategy and distinguish it from its competitors is entirely out of competition.

Although the economic characteristics of an industry limit the flexibility of enterprises to formulate strategies to compete with other competitors in the same industry, many enterprises still create a sustainable competitive advantage by formulating strategies that are difficult to be copied according to their specific requirements.

The main factors that affect enterprise strategy include regional and industrial diversification, product and service characteristics, etc. effective financial analysis should be based on the understanding of enterprise strategy.

That is to say, we should understand how different enterprises react positively to the factors restricting development and how to maintain the established strategy.

In order to understand the strategy of an enterprise, financial analysts should not only take a serious look at their strategic plans, but also investigate various concrete actions of their implementation plans.

In addition, a comparison of strategies between competing enterprises is also essential.

The so-called understanding is to understand the limitations of financial statements, such as the "profit management" made by the enterprise management authorities, which leads to the unreliability and unfairness of the financial statements. The so-called purification refers to the adjustments made by financial analysts to key items in the financial statements, such as profit margins, in order to enhance their reliability and fairness.

The main purpose of financial analysis is to make relevant evaluation for management decisions.

Management decision is a wide range of concepts. In terms of financial analysis, management decisions mainly include two categories: first, investment decisions; and two, credit decisions.

In fact, these two decisions involve the issue of enterprise valuation. To assess the value of an enterprise, we must return to profitability and risk assessment.

There are many financial ratios and indicators. What ratios are more relevant to management decisions? What proportion is more relevant to decisions?

Textbooks say that liquidity ratio and asset liability ratio are very useful for assessing the solvency of enterprises, but the same empirical study in the United States shows that the assessment of enterprises is of great importance.

And bankruptcy risk, asset return is the most useful, followed by the ratio of cash flow to total liabilities, and the last is the ratio of working capital to total liabilities, asset liability ratio and liquidity ratio.

Therefore, we must further study the relevance of financial ratios and related indicators to a specific management decision based on actual data.

In order to give full play to the role of financial analysis in management decision making, especially in enterprise valuation, the above five interrelated steps must be applied. These five steps constitute an effective financial analysis model.

Because it not only provides analysts with reasonable assumptions about management decision evaluation (industrial economic characteristics, enterprise strategy and purified financial statements), but also provides a logical and rational guide for financial analysis itself to serve management decisions.

In the process of purifying financial statements, financial analysts should pay attention to the following main aspects:

(1) no duplication of items or extraordinary items.

The impact of these projects on profitability is temporary, and should be considered before evaluating the real business performance of enterprises.

(2) research and development expenditures.

Artificial arrangements for research and development, advertising, human resources training and other expenditures directly affect the profitability of enterprises during different accounting periods. It is very necessary to maintain vigilance against the artificial arrangement of these expenditures in financial analysis.

Similarly, it may be necessary to make adjustments to these human arrangements when evaluating a company's continued operating performance.

(3) "

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Numerous empirical studies show that there are a lot of earnings management behaviors in enterprises.

For example, in the choice of accounting methods, it is necessary to confirm revenue and delay recognition fees ahead of time. For example, in order to cater for the requirements of management in the control of fixed assets depreciation and project completion schedule and the changes in accounting estimates, the selection of accounting methods and the timing of paction events, these earnings management may lead to deviation and inaccuracy in the financial statements of enterprises.

In financial analysis, it is essential to adjust them.

All these adjustments are for financial analysts to purify financial statements.

It is regrettable that not all enterprises provide the information that financial analysts need to adjust the key items of the financial statements.

Under such circumstances, financial analysts are soberly aware of the fact that

It is of great significance to fully consider this factor when interpreting the data of financial statements.

In financial analysis, people are more familiar with the calculation of financial ratios and related indicators, such as financial ratios such as turnover ratio, asset liability ratio, equity return rate, and common ratio statements, related growth rates and completion percentages.

However, how to scientifically use these ratios and indicators to assess the profitability and risks of enterprises is still far from enough.

At present, there is not a set of standard financial ratios and indicators. What kind of financial ratios and indicators are good? What kind of financial ratios and indicators are bad? No one can tell.

Our textbook says that the current ratio of 2 is normal, but an empirical study in the 60 years of the United States shows that the average turnover ratio of the normally run enterprises is more than 3, while the turnover ratio of the bankrupt enterprises is between 2 and 2.5.

Obviously, there is no standard for financial ratios. Only by linking them to industrial characteristics, business strategies, and even business cycles can they make sense.

Therefore, financial analysis is not only the analysis of financial accounting data.

In the financial analysis, the most important work should be to put the financial data of an enterprise in the industrial economy, securities and other capital market environment for multi comparison, in-depth analysis, link the financial data with the strategy of the enterprise to investigate the existing strengths and weaknesses, and scientifically assess the profitability and risk of the enterprise.