Financial Statement Analysis Financial statement analysis is the evaluation of a firm's financial statements in order to assess the firm's worth and its ability to meet its financial obligations. Lenders use the application of financial statement analysis and analytical tools to "general purpose" financial statements and related data for making business decisions based upon the financial statement information collected from their customers. Below are some key financial statement analysis criteria most all lenders can use and modify for use in the their own underwriting. Repayment Analysis In financial statement analysis, the repayment analysis criteria can provide a useful means for uncovering repayment problems by calculating key earnings ratios and measures. One limitation of this ratio is that it is at one point in time, which may not identify a cash earning deficit during the year. To complement this financial statement analysis, a cash flow can be a useful tool to determine if sufficient net earnings are available to meet payments on a timely basis. Financial statement analysis can utilize five key pieces of financial data, including net business income, non-farm income, family living and income taxes, principal and interest payments, and depreciation expense. This financial statement analysis data can be used to analyze the past as well as future earnings and can provide a means for a trend analysis. The procedure is the same whether one is doing a large commercial or agricultural loan or a small consumer credit request. Sensitivity Analysis In financial statement analysis, repayment analysis is not complete without testing the uncertainty that will frequent normal operations. This is particularly important in doing financial projections. The capital replacement and term debt margin is a measure that is useful in performing sensitivity analysis. This financial statement analysis is completed to determine if the smaller shocks of cost and interest increases and price decreases can be handled. For example, three basic financial statement analysis questions could be asked:
A general financial statement analysis "rule of thumb" is that a business should exhibit an ability to handle a 5% decline in revenue, a 5% increase in expenses and a 3% increase in variable interest rates. However, if a business is in an expansion mode, is relatively new or is entering a new enterprise, it is suggested that the amount is doubled to 10-10-6. Profitability In financial statement analysis, larger enterprises frequently are concerned about repayment capacity, liquidity and solvency. Profitability is under emphasized. The need for profits in a commercial business is analogous to the importance of breathing to humans; it is a necessity, not an option. Today one out of every five small businesses earn about 87% of net income. Businesses that are very profitable have a return on money greater than comparable investments in savings accounts and other investments with comparable risk. In agricultural financial statement analysis, the Farm Financial Standards Council recommends net farm income and three ratios be measured: return on assets, return on equity, and operating profit margin. The fourth of the five key ratios used in agriculture is any one of these key ratios or an earning trend in net farm income. The fastest most cost-effective way to maintain the quality of your financial statement analysis staff (loan officers, credit analysts, data entry staff) is to get them trained up and ready for the road ahead by running them through FCU eLearning curriculums. View FCU Lending Degree Programs Here...
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