There are generally three categories of financial analysis used by companies:
1. Liquidity (Working Capital) ratios - measures an enterprise's short term solvency. That is, the ability for the business to generate enough cash from its daily operations to services its existing loan commitments.
Examples of Liquidity ratios include:
- Current Ratio
- Debt Ratio
- Liquid (Quick Ratio)
- Receivables Turnover
- Average Collection Period
- Inventory Turnover
2. Profitability ratios - consists of tests to evaluate and enterprise's profit performance throughout the year. These results are viewed with regards to other data used to forecast the enterprise's potential profitability - basically, whether the enterprises operates at a satisfactory profit to survive.
Examples of Profitability ratios include:
- Return on Total Assets
- Profit Margin
3. Cash Flow analysis - is a review of an enterprises sources and application of funds. It is an historical look at the impact of events on the entity's pool of cash.
These facts are then coupled with an analysis of future events and, through using forecasting models (Cash inflow and outflow forecasts), management are able to determine whether any imbalances are likely to be incurred in the future.
