Chapter 12
FINANCIAL ANALYSIS : Financing

Analysing how a company is financed can be performed either by looking at several fiscal years, or on the basis of the latest available balance sheet.

In the dynamic approach, your main analytical tool will be the cash flow statement. Cash flow from operating activities is the key metric.

Cash flow from operating activities depends on the growth rate of the business and on the size and nature of working capital. Cash flow from operating activities must cover capital expenditure, loan repayment and dividends. Otherwise, the company will have to borrow more to pay for its past use of funds.

The company uses shareholders' equity and bank or financial debts to finance its investments. These investments must gradually generate enough positive cash flow to repay debt and provide a return to shareholders.

In the static approach, analysis tries to answer the following two questions: