Common problems with financial analysis

Last updated: 24.03.2016

Problems with inputs that will influence also the quality of the output from the financial analysis:

  • financial statements are prepared with a certain time lag (usually up to 6 months), the current situation can already be different
  • financial statements include the results of ad-hoc transactions that will not repeat in  the future
  • various methodologies used in accounting (e.g. inventory accounting method A or B, different methodology for provisioning, etc.)
  • objects in the balance sheet usually contain historical values rather than the current prices (i.e. the results can be distorted e.g. due to inflation)
  • closing balances in accounting may not correspond to economic reality - e.g. exceptionally high receivable, which was not paid by the end of the year or the acquisition of assets at the end of the accounting period when the balance sheet already shows assets and liabilities, but the property has not yet started to generate revenues
  • quality factors, such management competence and staff qualifications as  are not measured
  • financial statements (mainly profits) can be manipulated so that the results look better (so called window dressing)
  • intra-group transactions (e.g. trading at non-competitive prices or certainty of sales)
  • profit does not equal the cash-flow, the cost does not equal the expenditure and revenue does not equal the receipts
  • the use of estimates that may not be accurate

 

Problems with comparisons

  • there are no generally recommended values ​​for all indicators
  • recommended values do not necessarily be valid in every industry and entity and as such, it is difficult to deduce the ideal values
  • sectoral or national averages and values achieved by competition are often not available; or possibly, this data is only available for different periods or lack the basic assumptions, etc.
  • data for the previous periods are not available and as such, it is not possible make comparisons within the same entity over time (e.g. new company, significant changes etc.)
  • different divisions and companies within the group are not comparable
  • seasonality - when comparing month to month


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