Create 20 examples of financial analysis prompts. Explain each.
Okay, here are 20 examples of financial analysis prompts, designed to target different aspects of financial assessment, along with explanations for each:
Company Performance & Health Focused Prompts:
Prompt: Analyze the profitability trends of Company X over the past three fiscal years using Gross Profit Margin, Operating Profit Margin, and Net Profit Margin. Identify potential drivers for any significant changes.
Explanation: This prompt requires an analysis of a company's core profitability at different levels (before/after operating expenses and taxes). It focuses on identifying trends (improvement/decline) and encourages investigation into the underlying causes (e.g., cost changes, sales growth, pricing power).
Prompt: Assess the short-term liquidity position of Company Y using the Current Ratio and Quick Ratio based on its latest balance sheet. Discuss whether the company appears able to meet its short-term obligations.
Explanation: This focuses on a company's ability to pay its immediate debts. It requires calculating specific liquidity ratios and interpreting them in the context of financial health, considering the composition of current assets (especially inventory's role in the Quick Ratio).
Prompt: Evaluate Company Z's solvency and financial leverage using the Debt-to-Equity ratio and the Times Interest Earned (Interest Coverage) ratio over the last two years. Comment on the company's risk profile related to its debt load.
Explanation: This prompt assesses a company's long-term financial stability and its reliance on debt. It requires calculating leverage and coverage ratios to understand how much debt the company uses relative to equity and whether its earnings are sufficient to cover interest payments, indicating financial risk.
Prompt: Analyze Company A's operational efficiency using Inventory Turnover and Accounts Receivable Turnover ratios for the most recent fiscal year. Compare these ratios to industry averages (if available) or previous periods.
Explanation: This focuses on how effectively a company manages its working capital components. High turnover generally suggests efficiency in converting inventory to sales and collecting cash from customers. The prompt encourages comparison for context.
Prompt: Calculate and interpret the Return on Equity (ROE) for Company B for the past year. Use the DuPont analysis to break down ROE into its components (Net Profit Margin, Asset Turnover, Equity Multiplier). What does this breakdown reveal about the sources of its return?
Explanation: ROE measures return to shareholders. The DuPont framework dissects ROE to show whether returns are driven by profitability (margins), efficiency (asset use), or leverage (debt). This gives a deeper understanding than ROE alone.
Financial Statement Specific Prompts:
Prompt: Conduct a vertical analysis (common-size analysis) of Company C's Income Statement for the last two years. What significant changes do you observe in the proportion of costs or expenses relative to total revenue?
Explanation: Vertical analysis expresses each line item as a percentage of a base figure (like total revenue on the Income Statement). This makes it easier to compare trends in cost structure over time or between companies, regardless of absolute size.
Prompt: Perform a horizontal analysis (trend analysis) of Company D's Balance Sheet over the past three years, focusing on major asset and liability categories. Identify the most significant percentage changes and discuss potential implications.
Explanation: Horizontal analysis compares line items across different periods (e.g., year-over-year percentage change). This helps identify growth trends, shifts in asset allocation, or changes in financing structure.
Prompt: Analyze Company E's Statement of Cash Flows for the latest fiscal year. Differentiate between cash flows from operating, investing, and financing activities. Is the company generating positive cash flow from its core operations? How is it funding investments or paying down debt?
Explanation: This prompt focuses directly on cash movements, which can differ significantly from reported profit. It requires understanding the three main sections of the cash flow statement to see where cash is truly coming from and where it's going.
Investment & Valuation Focused Prompts:
Prompt: Calculate the Price-to-Earnings (P/E) ratio for Stock F and compare it to its main competitors and the industry average. What might this comparison suggest about the market's valuation of Stock F?
Explanation: The P/E ratio is a common valuation metric. Comparing it helps assess whether a stock is potentially overvalued or undervalued relative to its peers and its own earnings generation.
Prompt: Analyze the dividend history and sustainability of Company G. Calculate the Dividend Payout Ratio and assess the trend in dividend payments over the last five years. Is the dividend policy sustainable based on earnings and cash flow?
Explanation: This is relevant for income-focused investors. It requires examining the consistency and growth of dividend payments and using the payout ratio to determine if the company is returning a reasonable (and sustainable) portion of its earnings to shareholders.
Prompt: Perform a comparative financial ratio analysis between Company H and Company I, two competitors in the same sector. Focus on profitability, liquidity, and leverage ratios. Which company appears stronger financially based on this comparison?
Explanation: This prompt involves benchmarking. By directly comparing key ratios of competitors, analysts can identify relative strengths and weaknesses and make more informed judgments about performance and risk.
Budgeting, Forecasting & Decision Making Prompts:
Prompt: Develop a simple sales forecast for Company J for the next fiscal year, based on historical growth rates and stated assumptions about market conditions. Explain the rationale behind your forecast.
Explanation: This moves into forecasting. It requires analyzing past trends and making reasonable, documented assumptions about the future to project a key financial figure like sales revenue.
Prompt: Evaluate the financial viability of a proposed capital investment project (e.g., purchasing new equipment) using the Net Present Value (NPV) method. Assume a specific discount rate and project cash flows. Should the company proceed based on your analysis?
Explanation: This involves capital budgeting analysis. NPV is a core technique used to determine if a long-term investment is likely to generate more value than it costs, considering the time value of money.
Prompt: Conduct a sensitivity analysis on Company K's projected net income. How would net income change if sales were 10% lower than expected, or if the cost of goods sold was 5% higher than expected?
Explanation: Sensitivity analysis assesses risk by changing key assumptions in a financial model (like forecasts or budgets) to see the impact on outcomes. It helps understand which variables have the most significant effect on results.
Prompt: Analyze a provided departmental budget versus actual spending report. Identify significant variances (positive and negative), suggest potential reasons for these variances, and recommend corrective actions if necessary.
Explanation: This focuses on budget control and variance analysis. It's a common task in management accounting, requiring comparison of planned figures to actual results and investigation into discrepancies.
Broader Context & Specific Scenario Prompts:
Prompt: Analyze the impact of a recent significant economic event (e.g., interest rate hike, supply chain disruption) on the financial performance or position of a specific industry or company.
Explanation: This prompt requires connecting macroeconomic factors to microeconomic (company-level) financial analysis. It assesses the ability to understand how external events translate into financial consequences.
Prompt: Assess the working capital management efficiency of Company L over the past three years by analyzing its Cash Conversion Cycle. What does the trend suggest?
Explanation: The Cash Conversion Cycle measures how long it takes a company to convert its investments in inventory and other resources into cash. A shorter cycle is generally better, indicating efficient working capital management.
Prompt: You are considering extending credit to Company M. Analyze its recent financial statements (Balance Sheet, Income Statement) focusing on liquidity and leverage ratios to assess its creditworthiness.
Explanation: This prompt puts the analyst in the role of a creditor. The focus is specifically on ratios that indicate a company's ability to repay debt (liquidity for short-term, solvency/leverage for long-term).
Prompt: Analyze the financial implications of a potential merger or acquisition between Company N and Company O, focusing on potential synergies, impacts on leverage, and combined profitability (based on simplified pro forma assumptions).
Explanation: This involves M&A analysis. It requires thinking about how combining two companies might affect their overall financial profile, considering both potential benefits (synergies) and risks (increased debt).
Prompt: Review the financial statements of a non-profit organization. Analyze its revenue sources (donations, grants, program fees), expense allocation (program vs. administrative costs), and overall financial sustainability.
Explanation: This adapts financial analysis to the non-profit context. While profitability isn't the goal, analyzing revenue diversity, cost efficiency (especially program expense ratio), and financial reserves is crucial for assessing a non-profit's health and impact.
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