How to Use Excel for Financial Analysis

Excel is a fantastic tool for getting a better knowledge of the state of your company. Here is how to apply it to a few straightforward financial analysis calculations.

Excel is a financial powerhouse that makes handling intricate computations and manipulating data simple. It allows financial analysts, analyzers, and business owners to quickly and easily do in-depth financial analysis.

So let’s examine Excel’s fundamental financial formulae, functions, and analytical examples if you wish to use it for financial analysis.

Setting Up the Excel Spreadsheet

Setting up a sample data set from a fictitious company will be the first step. You can duplicate this data set to follow our lead and gain a better understanding of financial analysis in Excel.

Assume for the purposes of this analysis that XYZ Inc. is a small software company. Our financial analysis will be based on the data we have for 2021 and 2022. You can redo the example with your data once you have a better understanding of these ideas. However, you might wish to begin by making an Excel balance sheet if your data is not currently organized.

Common Financial Analysis Formulas

You may use a variety of formulae in Excel to assist you do financial analysis. Everything from simple arithmetic operations through ratios and percentages is included here.

The financial formulas listed below can be used to do a financial analysis in Excel.

1. Calculating Revenue and Sales Metrics

The following equations can be used to determine your dataset’s sales revenue and profit margins:

  • Sales revenue: This is the entire money you make from offering your goods and services for sale. The sales revenue is represented by the entire revenue in your dataset. In the aforementioned scenario, our sales revenue in 2021 was $1.2 million.
  • After subtracting the cost of products sold, the remaining revenue is known as the gross profit margin. Use this formula to compute it:((Sales Revenue – COGS) / Sales Revenue) * 100 = Gross Profit MarginIf you look at our example data, cell B12’s formula should read ((B2-B3)/B2)*100.

Net Profit Margin: Any company’s net profit margin is the amount of revenue that remains after deducting all costs, such as taxes and operating expenditures. You can use the following formula to determine the net profit margin.(Net Profit / Sales Revenue) * 100 equals Net Profit Margin.

2. Assessing Liquidity

A company’s liquidity ratio shows how well-equipped it is to handle its immediate financial responsibilities. This data is often used to assess a company’s ability to cover its present liabilities with its liquid assets.

Some of the typical formulas for calculating liquidity ratios in Excel for financial analysis include the following:

  • Current Ratio: This ratio formula determines a company’s short-term liquidity in order to assess its financial soundness. The formula is as follows:Current Assets / Current Liabilities equals the current ratio.To do this in our data set, we will divide the number in B7 by B8, and we have included an illustration below that illustrates our calculations for this portion.
  • Quick Ratio: You can use the following formula to get your quick ratio if you want to exclude your inventory from current assets (as it can be difficult to quickly turn it into cash):(Current Assets – Inventory) / (Current Liabilities) is the quick ratio.

3. Measuring Profitability

Profitability ratios are useful tools for assessing how well your business can turn a profit from its outlays and investments. They can help you determine how successfully and efficiently your business uses its resources.

Here are a few typical profitability ratios that Excel allows you to generate.

  • Return on Assets (ROA): This measures how well your business is able to make money off of its assets. This can be calculated using the following formula:(Net Income / Total Assets) * 100 = Return on AssetsNet income and total assets for our data set are computed to be $255,000 and $850,000, respectively. Therefore, we will apply the following equation to calculate ROA: =(B13/B7*100).
  • Return on Equity (ROE): As the name implies, this ratio shows how well your business turns equity from shareholders into profits. Use this formula to determine the amount:(Net Income / Shareholder Equity) * 100 = Return on Equity.

4. Evaluating Investment and Valuation

The company and the shareholders depend on the investment and valuation indicators. They give you information about your company’s overall financial situation.

Let’s examine a few standard valuation and investing ratios and how to compute them in Microsoft Excel.

  • Price-to-Earnings Ratio: This metric, which is popular among investors, contrasts the share price of a company with its earnings per share (EPS).Stock price / earnings per share (EPS) is the P/E ratio.
  • Price-to-Book Ratio: The P/B ratio contrasts the share price of a company with its book value. Usually, it is used to determine if a stock is overvalued or undervalued.P/B Ratio is calculated as follows: Stock Price / (Shareholder Equity / Outstanding Shares).

Exploring Advanced Financial Analysis Techniques

Although the fundamentals of financial analysis in Excel have been discussed above, you can improve your analysis skills by using a number of extra sophisticated approaches. Similar to the formulas we looked at previously, Excel has a variety of financial functions you can investigate.

Here are some additional topics you might want to research if your abilities in financial analysis continue to develop:

  • Advanced Statistical Analysis: You may perform financial analysis using a variety of statistical tools and procedures that Excel provides. Regression analysis, correlation analysis, time series, and other methods are some of these tools.
  • Advanced Financial Modeling: You can create financial models for more complex research, such as option pricing models and capital asset pricing models (CAPM).
  • Automation using VBA: You can use VBA to automate routine processes to increase productivity and efficiency in your financial analysis workflows.

Excel spreadsheet templates for personal finances are another option for improving personal money management.

Financial Analysis Made Easy

Users of Excel are given the resources they need to do a variety of financial analysis activities. You should be able to make better financial judgments and develop your skills as a financial analyst with the aid of the formulas covered above.

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