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Jul 18 2023
Analysis of the HDFC Bank’s share prospects, and performance

Analysis of HDFC Bank Shares: Prospects, Performance, and Investment Considerations

HDFC Bank, one of India’s leading private sector banks, has long been a preferred choice for investors seeking stability, growth, and reliability in the financial sector. As an investor, understanding the dynamics of HDFC Bank’s shares is crucial to make well-informed decisions. In this article, we will delve into a comprehensive analysis of HDFC Bank shares, exploring its historical performance, factors influencing its growth, and important considerations for potential investors.

HDFC
HDFC

  1. HDFC Company Overview

HDFC Bank, established in 1994, is part of the Housing Development Finance Corporation (HDFC) Group. It operates in various segments, including retail banking, wholesale banking, and treasury operations. Over the years, the bank has established a strong presence in the Indian market, offering a wide range of financial products and services.

  1. HDFC Historical Performance

HDFC Bank’s shares have shown remarkable growth over the years, becoming one of the most valuable and widely held stocks in the Indian equity market. The bank’s prudent management, robust risk controls, and consistent profitability have contributed to its impressive track record.

  1. HDFC Financial Performance

Analyzing the bank’s financial statements is crucial for potential investors. Key financial metrics such as revenue growth, net profit, asset quality, and capital adequacy should be closely examined. Investors should assess the bank’s ability to maintain stable profits and manage risks during various economic cycles.

Financial Statement Analysis: How Its Done by Statement Type

  1. Factors Influencing HDFC Bank’s Performance

a. Economic Conditions: HDFC Bank’s performance is closely tied to India’s economic growth. A thriving economy usually leads to increased demand for loans, higher consumer spending, and higher profitability for the bank.

b. Interest Rates: Fluctuations in interest rates impact the bank’s net interest income. A rising interest rate environment may compress the bank’s margins, while falling rates can stimulate loan demand.

c. Digital Transformation: HDFC Bank has been at the forefront of digital banking, leveraging technology to enhance customer experience and efficiency. Investors should monitor the bank’s progress in adopting innovative technologies to maintain a competitive edge.

d. Regulatory Environment: Changes in regulations and compliance requirements can influence the bank’s operations and profitability. Investors should stay updated on regulatory developments and their potential impact on HDFC Bank’s business.

  1. Risks and Challenges

Like any financial institution, HDFC Bank faces risks that could affect its performance. Credit risk, market risk, and operational risk are significant factors to consider. Moreover, intense competition from other banks and fintech startups may pose challenges to the bank’s market share.

  1. Investment Considerations

a. Long-Term Outlook: HDFC Bank’s track record suggests that it can be a stable long-term investment option. Investors seeking steady growth and dividends may find the bank’s shares appealing.

b. Diversification: It is essential to diversify an investment portfolio across various sectors and asset classes. While HDFC Bank may be a robust investment, spreading risk across different stocks is advisable.

c. Market Conditions: Assess market conditions and the overall economic outlook before making investment decisions. Evaluating the timing of your investment can impact potential returns.

d. Expert Advice: Consulting with a financial advisor can be valuable, especially for first-time investors or those unfamiliar with the Indian equity market.

Conclusion

HDFC Bank’s shares have been a beacon of stability and growth in the Indian financial sector. Its commitment to sound banking practices, innovative strategies, and customer-centric approach has attracted investors over the years. While past performance is not indicative of future results, a thorough analysis of the bank’s financials, market conditions, and risks can help investors make informed decisions. Remember that investing in the stock market carries inherent risks, and conducting due diligence is essential to ensure a well-balanced investment strategy.

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Kalinka Infotech 0 Comments
Jul 16 2023
Financial Statement Analysis: How Its Done by Statement Type

Financial Statement Analysis: How It’s Done, by Statement Type

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

Key Takeaways

  • Financial statement analysis is used by internal and external stakeholders to evaluate business performance and value.
  • Financial accounting calls for all companies to create a balance sheet, income statement, and cash flow statement, which form the basis for financial statement analysis.
  • Horizontal, vertical, and ratio analysis are three techniques that analysts use when analyzing financial statements.

Financial Statement Analysis

How to Analyze Financial Statements

The financial statements of a company record important financial data on every aspect of a business’s activities. As such, they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United States. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP, which requires accrual accounting. Private companies have greater flexibility in their financial statement preparation and have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Types of Financial Statements

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.

Transform the Financial Landscape with DEcenteralize FInance

 

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets, liabilities, and shareholder equity. Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit. It then moves to operating profit, which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the net income is reached.

Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.

Free Cash Flow and Other Valuation Statements

Companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company. Free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may keep a valuation statement as they progress toward potentially going public.

Financial Performance

Financial statements are maintained by companies daily and used internally for business management. In general, both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall financial performance.

When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results. Finally, ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively.

Below is a breakdown of some of the most common ratio metrics:

  • Balance sheet: This includes asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
  • Income statement: This includes gross profit margin, operating profit margin, net profit margin, tax ratio efficiency, and interest coverage.
  • Cash flow: This includes cash and earnings before interest, taxes, depreciation, and amortization (EBITDA). These metrics may be shown on a per-share basis.
  • Comprehensive: This includes return on assets (ROA) and return on equity (ROE), along with DuPont analysis.

What are the advantages of financial statement analysis?

Financial statement analysis evaluates a company’s performance or value through a company’s balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical, or ratio analysis, investors may develop a more nuanced picture of a company’s financial profile.

What are the different types of financial statement analysis?

Most often, analysts will use three main techniques for analyzing a company’s financial statements.

First, horizontal analysis involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods.

Second, vertical analysis compares items on a financial statement in relation to each other. For instance, an expense item could be expressed as a percentage of company sales.

Finally, ratio analysis, a central part of fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.

What is an example of financial statement analysis?

An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it generates profits and shareholder value. For instance, gross profit margin will show the difference between revenues and the cost of goods sold. If the company has a higher gross profit margin than its competitors, this may indicate a positive sign for the company. At the same time, the analyst may observe that the gross profit margin has been increasing over nine fiscal periods, applying a horizontal analysis to the company’s operating trends.

 

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Kalinka Infotech 3 Comments
Jul 9 2023
Financial Statements: List of Types and How to Read Them

What Are Financial Statements?

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements.

Key Takeaways

  • Financial statements are written records that convey the business activities and the financial performance of an entity.
  • The balance sheet provides an overview of assets, liabilities, and shareholders’ equity as a snapshot in time.
  • The income statement primarily focuses on a company’s revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company’s profit figure called net income.
  • The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.
  • The statement of changes in equity records how profits are retained within a company for future growth or distributed to external parties.

Understanding Financial Statements

Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about the future direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company’s financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

 

Not all financial statements are created equally. The rules used by U.S. companies is called Generally Accepted Accounting Principles, while the rules often used by international companies is International Financial Reporting Standards (IFRS). In addition, U.S. government agencies use a different set of financial reporting rules.

Balance Sheet

The balance sheet provides an overview of a company’s assets, liabilities, and shareholders’ equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the reporting period. Below is a breakdown of the items in a balance sheet.

Assets

  • Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of deposit.
  • Accounts receivables are the amount of money owed to the company by its customers for the sale of its product and service.
  • Inventory is the goods a company has on hand, which are intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked.
  • Prepaid expenses are costs that have been paid in advance of when they are due. These expenses are recorded as an asset because their value of them has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.
  • Property, plant, and equipment are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials.
  • Investments are assets held for speculative future growth. These aren’t used in operations; they are simply held for capital appreciation.
  • Trademarks, patents, goodwill, and other intangible assets can’t physically be touched but have future economic (and often long-term benefits) for the company.

Liabilities

  • Accounts payable are the bills due as part of the normal course of operations of a business. This includes utility bills, rent invoices, and obligations to buy raw materials.
  • Wages payable are payments due to staff for time worked.
  • Notes payable are recorded debt instruments that record official debt agreements including the payment schedule and amount.
  • Dividends payable are dividends that have been declared to be awarded to shareholders but have not yet been paid.
  • Long-term debt can include a variety of obligations including sinking bond funds, mortgages, or other loans that are due in their entirety in longer than one year. Note that the short-term portion of this debt is recorded as a current liability.

Shareholders’ Equity

  • Shareholders’ equity is a company’s total assets minus its total liabilities. Shareholders’ equity (also known as stockholders’ equity) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all of the company’s debt was paid off.
  • Retained earnings are part of shareholders’ equity and are the amount of net earnings that were not paid to shareholders as dividends.

Example of a Balance Sheet

Below is a portion of ExxonMobil Corporation’s (XOM) balance sheet for fiscal year 2021, reported as of Dec. 31, 2021.

  • Total assets were $338.9 billion.
  • Total liabilities were $163.2 billion.
  • Total equity was $175.7 billion.
  • Total liabilities and equity were $338.9 billion, which equals the total assets for the period.

Understand the Bookkeeping for Effective Financial Management

 

Income Statement

Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income, and earnings per share.

Revenue

Operating revenue is the revenue earned by selling a company’s products or services. The operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue examples include:

  • Interest earned on cash in the bank
  • Rental income from a property
  • Income from strategic partnerships like royalty payment receipts
  • Income from an advertisement display located on the company’s property

Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.

Expenses

Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).

Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.

The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods.

Investors can also see how well a company’s management is controlling expenses to determine whether a company’s efforts in reducing the cost of sales might boost profits over time.

Example of an Income Statement

Below is a portion of ExxonMobil Corporation’s income statement for fiscal year 2021, reported as of Dec. 31, 2021.

  • Total revenue was $276.7 billion.
  • Total costs were $254.4 billion.
  • Net income or profit was $23 billion.

Cash Flow Statement

The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. The cash flow statement complements the balance sheet and income statement.

The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.

There is no formula, per se, for calculating a cash flow statement. Instead, it contains three sections that report cash flow for the various activities for which a company uses its cash. Those three components of the CFS are listed below.

Operating Activities

The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash accounts receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing Activities

Investing activities include any sources and uses of cash from a company’s investments in the long-term future of the company. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category.

Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section. In short, changes in equipment, assets, or investments relate to cash from investing.

Financing Activities

Cash from financing activities includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Financing activities include debt issuance, equity issuance, stock repurchases, loans, dividends paid, and repayments of debt.

The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

Example of a Cash Flow Statement

Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results.

  • Operating activities generated a positive cash flow of $48 billion.
  • Investing activities generated negative cash flow or cash outflows of -$10.2 billion for the period. Additions to property, plant, and equipment made up the majority of cash outflows, which means the company invested in new fixed assets.
  • Financing activities generated negative cash flow or cash outflows of -$35.4 billion for the period. Reductions in short-term debt and dividends paid out made up the majority of the cash outflows.

Statement of Changes in Shareholder Equity

The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement is equal to the total equity reported on the balance sheet.

The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components:

  • Beginning equity: this is the equity at the end of the last period that simply rolls to the start of the next period.
  • (+) Net income: this is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end.
  • (-) Dividends: this is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company’s profits, the company may choose to give some profits away to investors.
  • (+/-) Other comprehensive income: this is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.

In ExxonMobil’s statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activity. This information is useful to analyze to determine how much money is being retained by the company for future growth as opposed to being distributed externally.

Consolidated Statement of Changes in Equity, ExxonMobil (2021).

Statement of Comprehensive Income

An often less utilized financial statement, a statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI). Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement. This financial statement shows a company’s total change in income, even gains and losses that have yet to be recorded in accordance to accounting rules.

Examples of transactions that are reported on the statement of comprehensive income include:

  • Net income (from the statement of income).
  • Unrealized gains or losses from debt securities
  • Unrealized gains or losses from derivative instruments
  • Unrealized translation adjustments due to foreign currency
  • Unrealized gains or losses from retirement programs

In the example below, ExxonMobil has over $2 billion of net unrecognized income. Instead of reporting just $23.5 billion of net income, ExxonMobil reports nearly $26 billion of total income when considering other comprehensive income.

Consolidated Statement of Comprehensive Income, Exxon Mobil 2021.

Nonprofit Financial Statements

Nonprofit organizations record financial transactions across a similar set of financial statements. However, due to the differences between a for-profit entity and a purely philanthropic entity, there are differences in the financial statements used. The standard set of financial statements used for a nonprofit entity includes:

  • Statement of Financial Position: this is the equivalent of a for-profit entity’s balance sheet. The largest difference is nonprofit entities do not have equity positions; any residual balances after all assets have been liquidated and liabilities have been satisfied are called “net assets”
  • Statement of Activities: this is the equivalent of a for-profit entity’s statement of income. This report tracks the changes in operation over time including the reporting of donations, grants, event revenue, and expenses to make everything happen.
  • Statement of Functional Expenses: this is specific to non-profit entities. The statement of functional expenses reports expenses by entity function (often broken into administrative, program, or fundraising expenses). This information is distributed to the public to explain what proportion of company-wide expenses are related directly to the mission.
  • Statement of Cash Flow: this is the equivalent of a for-profit entity’s statement of cash flow. Though the accounts listed may vary due to the different nature of a nonprofit organization, the statement is still divided into operating, investing, and financing activities.

 

The purpose of an external auditor is to assess whether an entity’s financial statements have been prepared in accordance with prevailing accounting rules and whether there are any material misstatements impacting the validity of results.

Limitations of Financial Statements

Although financial statements provide a wealth of information on a company, they do have limitations. The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company’s financial performance.

For example, some investors might want stock repurchases while other investors might prefer to see that money invested in long-term assets. A company’s debt level might be fine for one investor while another might have concerns about the level of debt for the company.

When analyzing financial statements, it’s important to compare multiple periods to determine if there are any trends as well as compare the company’s results to its peers in the same industry.

Last, financial statements are only as reliable as the information being fed into the reports. Too often, it’s been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown.

What Are the Main Types of Financial Statements?

The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues and costs, as well as its cash flows from operating, investing, and financing activities.

What Are the Main Items Shown in Financial Statements?

Depending on the corporation, the line items in a financial statement will differ; however, the most common line items are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.

What Are the Benefits of Financial Statements?

Financial statements show how a business operates. It provides insight into how much and how a business generates revenues, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements provide all the detail on how well or poorly a company manages itself.

How Do You Read Financial Statements?

Financial statements are read in several different ways. First, financial statements can be compared to prior periods to better understand changes over time. For example, comparative income statements report what a company’s income was last year and what a company’s income is this year. Noting the year-over-year change informs users of the financial statements of a company’s health.

Financial statements are also read by comparing the results to competitors or other industry participants. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.

What Is GAAP?

Generally Accepted Accounting Principles (GAAP) are the set of rules by which United States companies must prepare their financial statements. It is the guidelines that explain how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS).

The Bottom Line

Financial statements are the ticket to the external evaluation of a company’s financial performance. The balance sheet reports a company’s financial health through its liquidity and solvency, while the income statement reports a company’s profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, financial statements communicate how a company is doing over time and against its competitors.

 

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Corporate Finance Definition and Activities
Jun 29 2023
Corporate Finance Definition and Activities

Corporate Finance Definition and Activities

What Is Corporate Finance?

Corporate finance is a subfield of finance that deals with how corporations address funding sources, capital structuring, accounting, and investment decisions.

Corporate finance is often concerned with maximizing shareholder value through long- and short-term financial planning and the implementation of various strategies. Corporate finance activities range from capital investment to tax considerations.

Key Takeaways

  • Corporate finance is concerned with how businesses fund their operations in order to maximize profits and minimize costs.
  • It deals with the day-to-day demands on business cash flows as well as with long-term financing goals (e.g., issuing bonds).
  • Corporate finance also deals with monitoring cash flows, accounting, preparing financial statements, and taxation.
  • Determining whether or not to issue a dividend is another corporate finance activity.
  • Corporate finance jobs can pay attractive salaries.

Understanding Corporate Finance

Corporate finance departments are charged with managing their firms’ financial activities and capital investment decisions. Such decisions include whether to pursue a proposed investment and whether to pay for the investment with equity, debt, or both.

They also include whether shareholders should receive dividends, and if so, at what dividend yield. Additionally, the finance department manages current assets, current liabilities, and inventory control.

A company’s corporate finance activities are often overseen by its chief financial officer (CFO).

Corporate Finance Activities

Capital Investments

Corporate finance tasks include making capital investments and deploying a company’s long-term capital. The capital investment decision process is primarily concerned with capital budgeting.

Through capital budgeting, a company identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments with potential proceeds, and decides which projects to include in its capital budget.

Making capital investments is perhaps the most important corporate finance task and can have serious business implications. Poor capital budgeting (e.g., excessive investing or under-funded investments) can compromise a company’s financial position, either because of increased financing costs or inadequate operating capacity.

How to Successfully Handle Your Company’s Finances
Corporate financing includes the activities involved with a corporation’s financing, investment, and capital budgeting decisions.
Capital Financing
Corporate finance also involves sourcing capital in the form of debt or equity. A company may borrow from commercial banks and other financial intermediaries or may issue debt securities in the capital markets through investment banks. A company may also choose to sell stocks to equity investors, especially when it needs large amounts of capital for business expansions.
Capital financing is a balancing act involving decisions about the necessary amounts of debt and equity. Having too much debt may increase default risk, and relying heavily on equity can dilute earnings and value for early investors. In the end, though, capital financing must provide the capital needed to implement capital investments.
Short-Term Liquidity
A corporate finance department is also tasked with short-term financial management. The goal is to ensure that there is enough liquidity to carry out continuing operations. Short-term financial management concerns current assets and current liabilities, or working capital and operating cash flows.
A company must be able to meet all its current obligations when they are due. This involves having enough current liquid assets to avoid disrupting a company’s operations. Short-term financial management may also involve getting additional credit lines or issuing commercial paper as liquidity backup.
Working in Corporate Finance
Positions in the area of corporate finance attract many job seekers. In fact, there’s typically great competition for many of these types of jobs. Some of the many corporate finance job titles include:
  • Chief financial officer
  • Financial planning and analysis manager
  • Cost analyst
  • Financial analyst
  • Treasurer
  • Corporate accountant
Corporate finance salaries can vary among companies. However, according to top job site, Indeed, the national average annual salaries for the positions noted above are:
  • Chief financial officer: $133,898
  • Financial planning and analysis manager: $113,770
  • Cost analyst: $83,304
  • Financial analyst: $71,556
  • Treasurer: $80,428
  • Corporate accountant: $66,515
What Does Corporate Finance Do?
Corporate finance departments in companies focus on solid decision-making for profitable financial results. Thus, corporate finance involves activities that relate to the budgeting of capital, the debt and equity used to finance operations, management of working capital, and shareholder dividends.
What Is Corporate Finance vs. Finance?
Corporate finance is one of the subfields of the overall finance category. The others include public (or government) finance and personal finance.
What Are the 3 Main Areas of Corporate Finance?
The main areas of corporate finance are capital budgeting (e.g., for investing in company projects), capital financing (deciding how to fund projects/operations), and working capital management (managing assets and liabilities to operate efficiently).
The Bottom Line
Corporate finance is a subset of the field of finance. It concerns proper budgeting, raising capital to meet company needs and objectives with debt and/or equity, and the efficient management of a company’s current assets and liabilities. The various jobs in corporate finance can pay well.
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Jun 27 2023

How to Master Finance Management Importance & Key Principles
Finance Management: Understanding the Importance and Key Principles
Finance management is the strategic planning and managing of an individual or organization’s finances to better align their financial status to their goals and objectives. Depending on the size of a company, finance management seeks to optimize shareholder value, generate profit, mitigate risk, and safeguard the company’s financial health in the short and long term. When working with individuals, finance management may entail planning for retirement, college savings, and other personal investments.
Purpose of financial management
The purpose of financial management is to guide businesses or individuals on financial decisions that affect financial stability both now and in the future. To provide good guidance, financial management professionals will analyze finances and investments along with many other forms of financial data to help clients make decisions that align with goals.
Financial management can also offer clients increased financial stability and profitability when there’s a strategic plan for where, why, and how finances are allocated and used. How financial management professionals help clients reach goals will depend on whether the client is a company or an individual.
Types of financial management
Finance management professionals handle three main types of financial management for companies. These types involve various aspects of the internal decisions a company will likely need to make about cash flow, profits, investments, and holding debt. Many of these decisions will depend significantly on factors like company size, industry, and financial goals. Financial management professionals help companies reach financial goals by guiding in these areas of financing, investment, and dividends.
Financial management
Financial management professionals assist companies in major decisions that involve acquiring funds, managing debt, and assessing risk when borrowing money for purchases or to build the company. Financing is also required when raising capital. Companies can make better, more strategic financing decisions to raise capital or obtain funds when they have information on cash flow, market trends, and other financial stats on the health of a company.
Investment
Financial management professionals can help companies choose where to invest, what to invest in, and how to invest. The financial professional’s job is to determine the number of assets (both fixed and long term) a company will need to hold and where cash flow goes based on current working capital. In essence, this type of financial management is about assessing assets for risk and return ratios. Financial managers will consider a company’s profits, rate of return, cash flow, and other criteria to assist companies in making investment decisions.
Dividend
Companies should have a dividend disbursement plan and policy in place, with guidance from a financial management professional who can create and implement that plan, suggest modifications when needed, and monitor payouts if and when they occur. Any time a financial decision is made, it’s essential to consider dividend payments since you may hold dividends to fund certain financial decisions within the company.
It’s also important to have a flexible long-term plan that can grow with the company. Some more mature companies may pay out dividends at certain times or once a year; the payout schedule depends on many factors. Other companies may retain or reinvest dividend payments back into the company if the company is in a growth phase.
What is the financial management cycle?
The financial management cycle is a financial planning process critical to a company’s growth and development. It includes:
Effective financial management aligned with an organization’s goals and objectives can lead to greater efficiency and stability. These parts of the financial management cycle must work together to be the most effective.
1. Planning and budgeting
During this analytical phase in the financial management cycle, a company uses past and current financial data to set financial targets, modify objectives, and make changes to the current budget. This phase will typically involve detailed planning as well as a big picture one, meaning a company will look at day-to-day operations, long-term financial plans, and try to link financial targets to these activities.
The goal is to create a strategic financial plan for the company that aligns with objectives for the next three to five years. When setting specific budgets, a company may budget for one fiscal year at a time. A big reason for this is that a budget involves many moving parts that are subject to change by market fluctuations.
2. Resource allocation
Financial managers assign value to capital resources ( anything a company uses to manufacture/produce goods/services) and offer advice on allocating these resources based on criteria like projected company growth and financial goals. Resource allocation is important because it allows a company to have a long-term financial plan focused on its business objectives. Financial management professionals help companies by providing a framework for using capital resources and creating a portfolio that will generate the most revenue, given the company’s financial status.
3. Operations and monitoring
This phase is critical to protect against fraudulent activity, errors, compliance issues, or other variances in the allocation of funds, etc. Financial management professionals should run regular financial reviews of business operations and cash flow. These periodic reviews can help mitigate fraud and identify other issues. It is a preventative step that ensures the continuity of business operations by securing the validity and accuracy of a company’s financial processes.
4. Evaluation and reporting
Financial management professionals should evaluate a company’s current financial management system and propose changes when necessary. Financial reports and financial data can be helpful when assessing the efficiency and success of an existing system.
Some criteria a financial management professional may consider when evaluating a financial management system include security, compliance, company data needs, and level of support needed. These criteria vary by the company’s size, industry, current financial situation, and long-term goals.
Financial management professionals should be able to offer research-based suggestions that can help a company securely store and manage financial data in compliance with relevant laws and harness that data when needed.
How to work in finance management
To work in finance management, you’ll need a bachelor’s degree in business, economics, finance, or a related field. While there’s no mandatory licensure for careers in financial management, certification is highly recommended. In many cases, employers like to see at least five years of professional experience before hiring into a financial management position. Typical jobs that individuals may pursue as an entry point to finance management may include loan officer, junior tax accountant, personal finance advisor, or accountant.
How to Successfully Handle Your Companys Finance Efficiently
Educational requirements
A bachelor’s degree in finance, business management, or a related field is the minimum requirement to work in finance management. A master’s degree may be required for senior-level positions. Typical coursework for bachelor’s degree programs in finance or business management may include accounting, economics, finance, and human resources. Many master’s programs will offer internships, along with some bachelor’s programs. Internships are highly recommended.
Read more: Personal Money Management Insights:10 Essential Finance Tips
Certifications
Certification is optional but suggested if you plan on a long-term career in finance management. Professional trade organizations typically offer certification. The type of certification you earn can be specialized to your job title or role. Common certifications that financial management professionals hold include:
  • Certified Management Account (CMA) certification is offered by the Institute of Management Accountants (IMA) and is ideal for anyone wanting to work in financial management. Requirements include at least two years of professional experience and a bachelor’s degree.
  • Chartered Financial Analyst (CFA) certification offered by the CFA institute focuses on investment analysis. This certification is for financial management professionals who want to work in senior-level positions like CFO. Educational and experiential requirements are also necessary to enroll in the CFA program.
  • Certified Government Financial Manager (CGFM) certification offered by the Association of Government Accountants (AGA) is for professionals who work in government financial management specifically. You’ll need at least two years of professional experience in government financial management to earn certification.
  • Certified Treasury Professional (CTP) certification offered by the Association of Financial Professionals (AFP) can benefit anyone who wants to work in corporate treasury. This certification focuses on risk management, corporate liquidity, and ethics. You’ll need to meet educational and experiential requirements for this certification, with several options available for admittance into the CTP program.
Skills
Careers in finance management require a mix of financial skills and business skills. It’s essential to understand business operations, but proficiency in accounting, financial, and data analytics is equally important. Finance management merges management and finance. You may find success working in the field of finance management if you hold these skills:
Workplace skills
  • Good communication
  • Problem-solving skills
  • Organized
  • Quality leader
  • Proficiency in public speaking and presentation
  • Ability to manage a group of people
  • Detail-oriented
  • Analytical skills
  • Strong decision-making skills
  • Ethical
Technical skills
  • Basic and advanced math skills (algebra, statistics, basic computing)
  • Computer skills
  • Proficiency in financial management systems
  • Understanding of statistical modeling software and spreadsheets
  • Industry-specific knowledge
  • Proficiency in accounting principles and techniques
  • Understanding investment principles
Experience
Professional experience in finance or business management is key if you want to advance into upper-level finance management positions. Expect to work at least five years in an entry to mid-level finance position before being eligible to work in finance management. Remember, finance management careers are managerial positions, so requirements like experience and education matter. It’s not just the quantity of experience but also the quality that matters. Try to find jobs in finance or accounting. It’s also helpful to find jobs that can help you move into the specific industry that you want to work in.
Careers in finance management
The scope of careers in the finance management field is vast. From entry-level positions in bookkeeping to management positions like a financial manager or management accountant, you’ll have many career pathway choices.
The career you choose will depend on factors like education, certifications, professional experience, industry, employer, and location. Salaries among finance management jobs will also differ based on these factors. Individuals in senior-level positions like CFO and vice president of financial planning and analysis will be among the top-tier earners in finance management.
*All annual salary data is sourced from Glassdoor as of August 2022
Financial manager
Average annual salary (US): $133,190
Job outlook (2020 to 2030): +17% [1]
Financial managers oversee a financial department and may assist in creating strategic financial plans for an organization. Their duties include preparing financial reports and statements, forecasting, setting budgets, analyzing financial markets for trends and investment opportunities for an organization, and seeking ways to mitigate costs.
Financial advisor
Average annual salary (US): $106,012
Job outlook (2020 to 2030):  +5% [2]
Personal financial advisors assist individuals in planning for their future by helping them manage money and seek out investments based on individual situations. A personal financial advisor meets with individuals to set financial goals with short and long-term plans to achieve those objectives. Some financial aspects an advisor may handle include taxes, retirement, college savings, insurance, estate planning, and more. Financial advisors may work for an investment firm or on their own.
Financial analyst
Average annual salary (US): $93,605
Job outlook (2020 to 2030): +6% [3]
Financial analysts may work within a large corporation or with individuals. Their job is to analyze their client’s financial situation and make financial suggestions based on goals and financial status. A financial suggestion may include finding investment opportunities. The goal of an analyst is to evaluate market trends and position a client in a secure financial standing based on the analysis of trends and related data.
Management accountant
Average annual salary (US): $106,058 [4]
Management accountants work for corporations or government agencies. Their goal is to provide an in-depth financial analysis of an organization’s internal financial processes for strategic financial decision-making. Key decision makers in an organization use the information gathered by management accountants to aid in decision-making in the long and short term.
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Jun 27 2023

A Deep Dive into Financial Analysis: Definition, Importance, and Practical Applications
What Is Financial Analysis?
Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.
Key Takeaways
  • If conducted internally, financial analysis can help fund managers make future business decisions or review historical trends for past successes.
  • If conducted externally, financial analysis can help investors choose the best possible investment opportunities.
  • Fundamental analysis and technical analysis are the two main types of financial analysis.
  • Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security.
  • Technical analysis assumes a security’s value is already determined by its price, and it focuses instead on trends in value over time.
Understanding Financial Analysis
Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company’s financial statements—the income statement, balance sheet, and cash flow statement. Financial analysis can be conducted in both corporate finance and investment finance settings.
One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company’s own historical performance.
For example, return on assets (ROA) is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis.
 
There is no single best financial analytic ratio or calculation. Most often, analysts use a combination of data to arrive at their conclusion.
Corporate Financial Analysis
In corporate finance, the analysis is conducted internally by the accounting department and shared with management in order to improve business decision making. This type of internal analysis may include ratios such as net present value (NPV) and internal rate of return (IRR) to find projects worth executing.
Many companies extend credit to their customers. As a result, the cash receipt from sales may be delayed for a period of time. For companies with large receivable balances, it is useful to track days sales outstanding (DSO), which helps the company identify the length of time it takes to turn a credit sale into cash. The average collection period is an important aspect of a company’s overall cash conversion cycle.
A key area of corporate financial analysis involves extrapolating a company’s past performance, such as net earnings or profit margin, into an estimate of the company’s future performance. This type of historical trend analysis is beneficial to identify seasonal trends.
For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas. This allows the business to forecast budgets and make decisions, such as necessary minimum inventory levels, based on past trends.
Investment Financial Analysis
In investment finance, an analyst external to the company conducts an analysis for investment purposes. Analysts can either conduct a top-down or bottom-up investment approach. A top-down approach first looks for macroeconomic opportunities, such as high-performing sectors, and then drills down to find the best companies within that sector. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company’s fundamentals.
A bottom-up approach, on the other hand, looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis, looking at past performance and expected future performance as investment indicators. Bottom-up investing forces investors to consider microeconomic factors first and foremost. These factors include a company’s overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time.
 
Financial analysis is only useful as a comparative tool. Calculating a single instance of data is usually worthless; comparing that data against prior periods, other general ledger accounts, or competitor financial information yields useful information.
Types of Financial Analysis
There are two types of financial analysis: fundamental analysis and technical analysis.
Fundamental Analysis
Fundamental analysis uses ratios gathered from data within the financial statements, such as a company’s earnings per share (EPS), in order to determine the business’s value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security’s current price in order to see whether the security is undervalued or overvalued.
Technical Analysis
Technical analysis uses statistical trends gathered from trading activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.
Horizontal vs. Vertical Analysis
When reviewing a company’s financial statements, two common types of financial analysis are horizontal analysis and vertical analysis. Both use the same set of data, though each analytical approach is different.
Horizontal analysis entails selecting several years of comparable financial data. One year is selected as the baseline, often the oldest. Then, each account for each subsequent year is compared to this baseline, creating a percentage that easily identifies which accounts are growing (hopefully revenue) and which accounts are shrinking (hopefully expenses).
Vertical analysis entails choosing a specific line item benchmark, then seeing how every other component on a financial statement compares to that benchmark. Most often, net sales is used as the benchmark. A company would then compare cost of goods sold, gross profit, operating profit, or net income as a percentage to this benchmark. Companies can then track how the percent changes over time.
Examples of Financial Analysis
In the nine-month period ending Sept. 30, 2022, Amazon.com reported a net loss of $3 billion. This was a substantial decline from one year ago where the company reported net income of over $19 billion.
Amazon.com, Q3 2022 Statement of Operations.
Financial analysis shows some interesting facets of the company’s earnings per share (shown above. On one hand, the company’s EPS through the first three quarters was -$0.29; compared to the prior year, Amazon earned $1.88 per share. This dramatic difference was not present looking only at the third quarter of 2022 compared to 2021. Though EPS did decline from one year to the next, the company’s EPS for each third quarter was comparable ($0.31 per share vs. $0.28 per share).
Analysts can also use the information above to perform corporate financial analysis. For example, consider Amazon’s operating profit margins below.
  • 2022: $9,511 / $364,779 = 2.6%
  • 2021: $21,419 / $332,410 = 6.4%
From Q3 2021 to Q3 2022, the company experienced a decline in operating margin, allowing for financial analysis to reveal that the company simply earns less operating income for every dollar of sales.
Why Is Financial Analysis Useful?
The financial analysis aims to analyze whether an entity is stable, liquid, solvent, or profitable enough to warrant a monetary investment. It is used to evaluate economic trends, set financial policies, build long-term plans for business activity, and identify projects or companies for investment.
How Is Financial Analysis Done?
Financial analysis can be conducted in both corporate finance and investment finance settings. A financial analyst will thoroughly examine a company’s financial statements—the income statement, balance sheet, and cash flow statement.
One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company’s own historical performance. A key area of corporate financial analysis involves extrapolating a company’s past performance, such as net earnings or profit margin, into an estimate of the company’s future performance.
What Techniques Are Used in Conducting Financial Analysis?
Analysts can use vertical analysis to compare each component of a financial statement as a percentage of a baseline (such as each component as a percentage of total sales). Alternatively, analysts can perform horizontal analysis by comparing one baseline year’s financial results to other years.
Many financial analysis techniques involve analyzing growth rates including regression analysis, year-over-year growth, top-down analysis such as market share percentage, or bottom-up analysis such as revenue driver analysis.
Last, financial analysis often entails the use of financial metrics and ratios. These techniques include quotients relating to the liquidity, solvency, profitability, or efficiency (turnover of resources) of a company.
What Is Fundamental Analysis?
Fundamental analysis uses ratios gathered from data within the financial statements, such as a company’s earnings per share (EPS), in order to determine the business’s value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security’s current price in order to see whether the security is undervalued or overvalued.
What Is Technical Analysis?
Technical analysis uses statistical trends gathered from market activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.
The Bottom Line
Financial analysis is a cornerstone of making smarter, more strategic decisions based on the underlying financial data of a company. Whether corporate, investment, or technical analysis, analysts use data to explore trends, understand growth, seek areas of risk, and support decision-making. Financial analysis may include investigating financial statement changes, calculating financial ratios, or exploring operating variances.
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