Business Analysis refers to the process of evaluating a company's economic prospects and risks.
This includes analyzing a company's business environment, its strategies, and its financial position and performance.
The goal of business analysis is to improve business decisions by evaluating available information about a company's financial situation, its management, its plans and strategies, and its business environment.
Business Anaysis manly entails the evaluation of the business's prospects and risks by the different decision makers who include:
- Equity Investors
- Merger and Acquisition Analysts
- External Auditors
- Employees & Unions
Information Sources for Business Analysis
Management Discussions & Analysis
Types Of Business Analysis
This analysis looks at the ability of the firm to honor credit obligations. This focuses on the downside risk.
Credit analysis entails looking at two main aspects, namely:
- Liquidity: This is the ability of the firm to honor its short term obligations. The focus is on current assets, liquidity of assets and make up of current assets and liabilities.
- Solvency: This is the ability of the firm to honor its long term obligations. The focus is on capital structure and long term profitability.
This entails the analysis of the downside risks and upside potential for shareholders.
There are two main methods in equity analysis:
Technical Analysis/Charting: This involves the analysis of charts to mainly looking at price and volume history of a stock with the main aim of trying to predict future price movements.
Fundamental Analysis: This involves determination of intrinsic value without reference to price. It entails analysis and interpretation of key factors such as economy, industry and company.
This entails the analysis of financial statements to provide managers with clues on strategic changes in operating, investing, and financing activities.
They also analyze the businesses and financial statements of competing companies to evaluate a competitor's profitability and risk.
Such analysis allows for inter-firm comparisons, both to evaluate relative strengths and weaknesses and to benchmark performance.
Business analysis is performed whenever a company restructures its operations, through mergers, acquisitions, divestitures, and spin-offs.
Investment bankers need to identify potential targets and determine their values, and security analysts need to determine whether and how much additional value is created by the merger for both the acquiring and the target companies.
Directors are elected representatives of the shareholders and are responsible for protecting the shareholders' interests by vigilantly overseeing the company's activities.
Both business analysis and financial statement analysis aid directors in fulfilling their oversight responsibilities.
Regulators may perform financial statment analysis to determine accuracy of tax returns