5 Key Elements in Financial Analysis for Investors

Assalamualaikum and greetings to everyone...

How are you all doing?

I hope you are all in good health.

For those who may be feeling a bit under the weather, perhaps with a fever or a cold — understandable, as the weather in our country alternates between rain and scorching heat.

I pray that you recover quickly and return to good health as before.

Right, today I will begin sharing about the key elements in financial analysis.

It can also be referred to as the accounting system.

It is more about analysing numbers.

This is different from the annual report series part 1 to part 7.

As you can see from the title, this entry is part 1, so there will be several instalments in this series.

You can follow along closely.

Financial Analysis??

What is the purpose of financial analysis?

Banknote concept illustration Free Vector

What is its use and benefit?

Firstly, if you wish to start investing in a company but are unsure whether it is worthwhile or not, then this analysis is important for you.

For those who already hold shares but do not know when or what the suitable price is — at some point, you will need to evaluate the company''s financial statements to determine whether they are good or otherwise, and whether you want to continue investing. This analysis is therefore very important.

It is also important for financial institutions making decisions on whether to grant loans. By evaluating a company''s performance — whether it is strong or not — before granting loans.

Why?

Certainly, financial institutions will not lend to parties that are unable to repay the loan.

And of course, the purpose of financial analysis is because accounting is the language of business.

It is impossible for someone to understand financial knowledge without understanding its ''language''.

5 Key Elements

A – Asset
L – Liability
E – Equity
R – Revenues
X – Expenses

1. Asset

An asset is cash and property such as land, houses and buildings owned by an individual, a company or an organisation.

It is a valuable resource used to carry out business activities in order to generate income for the business.

For example, we want to start a business selling clothes.

What do we need to start the business?

We would need:

Capital
Fabric
Equipment (sewing machine, scissors, thread, etc.)

What we have listed above are the assets in our business.

We need these assets to generate income in the clothing business we have planned.

Easy to understand, right?

2. Liability

Liability, in simple terms, is debt.

Going back to the clothing business earlier, if the business owner lacks capital to purchase fabric (in large quantities), they can borrow or obtain credit from the fabric supplier (fabric received but not yet paid for).

InshaAllah, when the clothing business succeeds and achieves high sales, the business owner can then use the money to repay the debt to the fabric supplier.

I hope you understand so far.

3. Equity

In simple terms, equity is the net ownership of shareholders.

The formula is E (Equity) = A (Asset) – L (Liability).

For example, the clothing company has assets totalling RM1 million.

It also has liabilities of RM200,000, so the equity is:

Equity = RM1 million (1,000,000) – RM200,000 (200,000)

= RM800,000

4. Revenues

It is also known as sales or income.

It does not matter whether the client purchases the product with cash or on credit.

For example, there are 3 customers who buy a T-shirt priced at RM100.

Two customers pay in cash whilst one wants to buy on credit.

Total revenue remains RM300.

Understand?

5. Expenses

All expenditures of a company.

Also known as ''money going out''.

For example, costs involved in purchasing assets and expenditures for the company.

Frequently Asked Questions (FAQ)

1. What are the 5 key elements in financial analysis?

The five key elements in financial analysis are Assets, Liabilities, Equity, Revenue and Expenses. These five elements form the foundation of a company''s accounting system.

2. Why do investors need to understand the elements of financial analysis?

Investors need to understand these elements to evaluate a company''s financial performance before investing. It helps in making more accurate investment decisions based on the company''s actual financial data.

3. What is the difference between revenue and expenses?

Revenue is the income or proceeds a company receives from the sale of products or services. Expenses, on the other hand, are all company expenditures including the cost of purchasing assets and operating costs.

4. How does equity relate to investment decisions?

Equity shows the net value of a company after deducting all liabilities from assets. High equity indicates that the company has a strong financial position and potential for growth.

Want to learn financial analysis in greater depth? Open a CDS account with Mahersaham and join exclusive classes for Mahersaham clients. Also download our free stock ebook for a basic investment guide.