Corporate Financial Analysis: The Key to Sustainable Business Management and Development

In an increasingly competitive and volatile business landscape, corporate financial analysis plays a vital role in helping managers make more informed decisions, optimize operational efficiency, and mitigate risks. This article will clarify the significance of financial analysis, highlight key financial ratios to monitor, and outline essential elements in analyzing corporate financial statements—empowering executives to make sound decisions.

The Significance of Financial Analysis

Financial analysis is the process of using tools and techniques to assess financial statements, thereby identifying a company’s strengths, weaknesses, and growth potential. It’s not just about reading numbers—it’s about decoding the story behind them to support effective management. Its key roles include:

• Evaluating Operational Efficiency: Analysis helps measure profitability, such as a 15% increase in gross margin at a retail company after cost optimization.

  
  

• Supporting Decision-Making: It provides data for investment choices, restructuring, or market expansion—for example, Vingroup used financial analysis to enter the electric vehicle market.

  
  

• Managing Financial Risks: Early detection of issues such as bad debts or cash flow shortages helps businesses avoid crises, as demonstrated by Novaland’s debt restructuring in 2023.

  
  

• Attracting Investment: Transparent financial reports and in-depth analysis increase funding opportunities from banks or investors by 50%, according to PwC research.

  
  

• Planning and Forecasting: It enables long-term planning by predicting financial trends based on historical data.

Insight: Financial analysis serves as a “compass” for business leaders, guiding organizations not just to survive—but to grow sustainably in a highly competitive environment.

Key Financial Ratios to Monitor

To fully assess a company’s financial “health,” managers need to track 12 key financial ratios, categorized into four main groups:

1. Liquidity Ratios

Measure the ability to meet short-term liabilities:

Current Ratio = Current Assets / Current Liabilities → should be > 1.

E.g., a ratio of 1.5 indicates adequate debt repayment capacity.

Quick Ratio = (Current Assets - Inventory) / Current Liabilities → should be > 0.5.

Reflects liquidity independent of inventory.

2. Operational Efficiency Ratios

Assess asset usage and debt management:

Inventory Turnover = Cost of Goods Sold / Average Inventory.

Higher than the industry average (e.g., 6 times/year) indicates efficient inventory management.

Asset Turnover = Revenue / Total Assets.

E.g., a ratio of 0.8 means every dollar of assets generates $0.80 in revenue.

3. Profitability Ratios

Measure earnings from operations:

• Gross Profit Margin = (Revenue - COGS) / Revenue × 100%.

E.g., 30% indicates strong profitability.

• Net Profit Margin = Net Profit / Revenue × 100%.

E.g., 10% is a safe level.

• ROE (Return on Equity) = Net Profit / Equity × 100%.

Should be > 15%, e.g., Vinamilk achieved 25% in 2023.

4. Leverage Ratios

Evaluate debt usage:

Debt Ratio = Total Liabilities / Total Assets → should be < 0.6 to minimize financial risk.

Debt to Equity Ratio = Total Liabilities / Shareholder’s Equity → should be < 2.

E.g., 1.2 indicates a balanced capital structure.

Tip: Compare these ratios with competitors or industry averages for accurate assessment.

For example, Mobile World’s ROE is 20% higher than the retail sector average—demonstrating superior efficiency.

Key Elements in Analyzing Financial Statements

Analyzing a company’s financial statements requires examining the three core statements (Balance Sheet, Income Statement, and Cash Flow Statement) along with related factors. Below are five key elements:

1. Balance Sheet

Reflects assets, liabilities, and equity at a specific point in time:

Assets: Analyze the composition of current (cash, inventory) and non-current (fixed assets) assets.

E.g., if current assets account for 60% of total assets, the company has high liquidity.

Liabilities: Assess the proportion of short-term and long-term debt.

E.g., long-term debt > 50% of total liabilities may indicate financial pressure.

Equity: An equity ratio > 30% suggests low debt dependence.

E.g., FPT achieved 40% in 2024.

2. Income Statement

Shows revenue, expenses, and profit over a period:

Revenue: Compare revenue growth over the years.

E.g., a 15% increase suggests stable operations.

Expenses: Analyze operating, marketing, and interest costs to detect inefficiencies.

E.g., if marketing costs increase 20% without corresponding revenue growth, adjustments are needed.

Profit: Evaluate gross and net profit margins to measure profitability.

3. Cash Flow Statement

Tracks cash from operating, investing, and financing activities:

Operating Cash Flow: Positive cash flow (e.g., VND 500 million) indicates internal financial strength.

Investing Cash Flow: Negative cash flow (e.g., -VND 200 million) due to fixed asset investment can be positive if it supports growth.

Financing Cash Flow: Monitor cash from borrowing or dividends to evaluate capital structure.

4. Financial Ratio Analysis

Combine ratios (liquidity, profitability, leverage) for comprehensive evaluation.

E.g., use the DuPont model to analyze ROE drivers—from profit margins, asset efficiency, or debt use.

5. Industry Benchmarking and Context

Place financials in the context of the industry and competitors:

Industry Comparison:

E.g., a real estate firm’s debt ratio should be lower than the industry average of 0.7 to reduce risk.

Market Trends: Analyze how inflation or tax policies impact financials.

E.g., increased VAT affects input costs.

Conclusion:

Financial analysis is not just a tool—it’s the compass guiding businesses through challenges and toward new opportunities. By monitoring key metrics such as ROE and Debt Ratio and analyzing the three core statements, companies can optimize performance, attract investment, and grow sustainably.

W&A has summarized the most essential aspects of corporate financial analysis that every manager should understand to make informed decisions through financial statement evaluation and structured analytical methods. We hope this article proves valuable and helps elevate your business in today’s competitive market!

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