Financial analysis report definition
/What is a Financial Analysis Report?
A financial analysis report is constructed by a person who is researching a company, usually with the intent of recommending its stock to investors. The report needs to cover the essentials of the target company, so that investors understand how it does business, what its competitive advantages are, and why it is a good investment. These documents are intensively reviewed by investors, who need the information to make investment decisions.
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The Interpretation of Financial Statements
Components of a Financial Analysis Report
The essential parts of the financial analysis report are noted below.
Company Overview
The report begins with a description of the company. This description addresses what the company does, the industry in which it operates, and its competitive advantages (if any). The best source of this information is the company's Form 10-K filings with the Securities and Exchange Commission, which are highly detailed. Another good source is the reports generated by other analysts.
Investment Essentials
This section addresses the pros and cons of making an investment in the company. The analysis includes a thorough review of the cash flow, liquidity, and debt levels of the business, with projections for how they might change in the future.
Valuation
This section calculates how much the stock is worth. There are several ways to do so. A stock can be valued based on the discounted cash flows of the business, by comparing the results of the company to its competitors (using the price/earnings ratio), and by comparing its book value to the current price of the stock to see if the stock is overvalued or undervalued. The report may also contain a trend line showing how the stock valuation has varied over time.
Risk Analysis
This section identifies those risks that are most likely to keep the company from achieving the valuation stated in the report. This information is most easily derived from the risks section of the company's Form 10-K. For example, the report might state that the company is heavily dependent on a certain raw material for which supplies are uncertain. Another risk is that regulatory approval is required for its products, so the ability to launch new products is not entirely under the control of the company.
Detailed Results
The detailed results section includes summary versions of the company's financial statements, along with interpretations of the statements. This may include selected ratios, pie charts, trend lines, and so forth. The information presented in this section should bolster the information already presented in the report. A well-written report will exclude areas that are not needed to support the valuation analysis of the business; this is critical, since the intent is to write a report that is just long enough, without burdening readers with superfluous information.
Recap
This section summarize the points made, both in favor of and against the company, and end with a recommendation for what to do with the company's stock.
The key part of a financial analysis report is finding the few key drivers or bottlenecks that will allow a stock to gain value if they are handled correctly.
Advantages of a Financial Analysis Report
A financial analysis report is the best source of information for an investor, since it represents a detailed analysis of the key elements of the financial circumstances of a business. The report is usually compiled by someone with a good knowledge of the industry and how the target company is positioned within it, and so is a good representation of the current circumstances of a business entity.