Financial data is the lifeblood of informed business decision-making. It encompasses information gleaned from both traditional sources like financial statements as well as alternative data from non-conventional sources. This comprehensive guide will explore the definition, types, applications and analysis of financial data to help gain strategic insights.
Understanding Traditional Financial Data
Financial statements and filings have historically provided a wealth of data to evaluate a company‘s fiscal health and performance.
Balance Sheet
A balance sheet is a snapshot of a company‘s financial standing at a point in time, laying out its assets, liabilities and shareholders‘ equity. Assets like cash, inventory, and property represent resources owned while liabilities like debt and payables are obligations owed. Equity indicates leftover assets after paying off liabilities.
For example, as of 31 Dec 2021, Apple Inc. reported total assets of $367 billion, including $66 billion in inventory and $34 billion in cash & cash equivalents. Its total liabilities stood at $312 billion, mostly comprising debt and accounts payable. Apple‘s shareholders‘ equity was $55 billion.
Income Statement
An income statement summarizes a company‘s revenues, expenses and profitability over a period, typically quarterly or annually.
For fiscal 2021 ending September 2021, Microsoft reported total revenues of $168 billion. Its major expenses included cost of revenue ($43B), R&D ($21B), sales & marketing ($18B) and other expenses, totaling $119 billion. By subtracting expenses from revenue, Microsoft reported a net income of $61 billion.
Cash Flow Statement
The cash flow statement records the actual inflows and outflows of cash from business activities, categorized as:
- Operating – Core business activities
- Investing – Capital expenditures
- Financing – Funds from loans, equity etc.
This helps gauge a company‘s liquidity. Apple reported $105 billion in cash from operations in 2021. It spent $33 billion on investment activities and had a net cash outflow of $29 billion from financing activities.
Annual & Quarterly Reports
These filings provide detailed qualitative and quantitative information on a company‘s financials, business model, strategies, risks, outlook etc.
According to PWC, over 90% of investors consider annual reports as the most useful source of information on companies.
The Rise of Alternative Data
Alternative data from non-conventional sources provides granular insights not found in financial statements. According to Forrester, 66% of data and analytics decision makers rely on external data.
Some examples include:
- Web traffic metrics like visitor counts, clickstream data
- Social media activity such as brand mentions, sentiment
- Credit card transactions, point-of-sale data
- Satellite images, geospatial data
- Product reviews, customer support tickets
Per PWC, alternative data provides unique predictive signals for revenue, foot traffic etc. PwC estimates the market to reach $7 billion by 2020.
Data aggregators use methodologies like web scraping to extract alternative data. Machine learning helps analyze massive, unstructured data sets.
Analyzing Financial Data
Analysts rely on different techniques to parse financial data for actionable insights:
Financial Ratio Analysis
By comparing line items, ratios quantify a company‘s liquidity, solvency, efficiency and profitability:
- Liquidity – Current ratio, quick ratio
- Solvency – Debt-to-equity ratio
- Efficiency – Inventory turnover, asset turnover
- Profitability – Gross margin, return on equity
For example, Apple had a current ratio of 1.08 in 2021 indicating it can meet short-term obligations. Its return on equity stood at 1.33 or 133%, indicating robust profitability.
Trend Analysis
By evaluating metrics over consecutive time periods, analysts can spot financial trends:
- Revenue growth – Apple‘s revenue rose 33% from 2020 to 2021
- Margin expansion – Facebook‘s gross margin has grown steadily from 70% to 80% since 2018
Forecasting
Using historical data and statistical modeling, future performance can be predicted. This helps estimate metrics like future revenues, cash flows.
Visualization
Creating charts, graphs and dashboards makes it easier to spot patterns and changes in financial KPIs.
Sample Financial Data Dashboard (Source: Sisense)
Tools for Financial Data Analysis
While spreadsheets help, managing and deriving insights from large, complex financial data requires specialized tools:
- Data Extraction – Web scraping tools to gather alternative data from websites. e.g. Import.io, Apify
- Data Warehouses – Cloud-based storage like Snowflake for cleaned, structured data.
- Business Intelligence – Tools like Tableau, Looker, Power BI for data modeling, visualization and dashboards.
- Financial Modeling – Excel add-ins like FMCG for forecasting, valuation and scenario modeling.
Key Takeaways
- Financial data provides the fuel for strategic business decisions. It encompasses traditional metrics from statements and alternative data.
- Alternative data from unconventional sources offers valuable insights not found in conventional data sources. Adoption of alternative data is rising.
- Analysts rely on techniques like ratio analysis, forecast modeling and data visualization to parse financial data.
- Specialized analytics tools help manage large, unstructured datasets and derive strategic insights faster.
Hope this guide offered an in-depth perspective into financial data – its relevance, sources, applications and analysis. Proper harnessing of data leads to optimal business outcomes.
