Last Updated on March 8, 2023 by hassan abbas

Financial spreading is the process of transferring data from a borrower’s financial statement to the bank’s financial analysis spreadsheet. It involves evaluating a borrower’s tax documents and financial statements for the past few years, enabling an analyst to identify patterns and trends over the years. It helps a financial institution understand a borrower’s financial condition and behavior, based on which they make crucial financial decisions. Simply put, spreading financial statements involves analyzing the current financial information to foresee future financial performance.
Objectives of Spreading Financial Statements
The primary objective of financial spreading is to present a borrower’s complex financial data to the financial institution. The information helps the entity make strategic decisions while conducting credit appraisals, rating analyses, and investment advisory. The financial spreading process often comprises several counterparties, including entities in different countries and languages.
Spreading financial statements aims to achieve the following results:
Balanced ratio amidst the bank and the borrower
An all-inclusive account report
Financial statements of income
Updated statements of cash flow
Net worth rapprochement
While a financial spread gives more, financial bodies have benchmarks for these points against borrowers. Based on these standards, they assess the risk involved in sanctioning a loan and calculate the company’s liquidity if it fails to repay on time. From that perspective, spreading financial statements reduces risk, even though different banks use various implementation methods.
Different Methods of Financial Spreading
This guide will break down some critical methods to spread financial statements.
Income Statement Spreading
Many analysts prefer beginning their spreading with the borrower’s income statement. Undoubtedly, the borrower’s income is one of the first things banks think about while analyzing finances. They often ask questions regarding the borrowing company’s revenue, profitability, and margins.
They dive into the income statements to verify answers to these questions by conducting vertical and horizontal analyses. The vertical analysis involves comparing each line item to its revenue in percentage. Key metrics to check include gross profit, depreciation, cost of goods sold, interest, earnings before tax, net earnings, etc. The horizontal analysis looks at each line item’s financial change year after year.
Leverage Ratios and Balance Sheet Spreading
After analyzing the income statements, the analysts move on to their balance sheet to evaluate a business’s operational efficiency. They compare several income statement items to the balance sheet accounts.
A business’s primary liquidity ratios include quick ratio, net working capital, current ratio, etc. The core leverage ratios are debt to equity, interest coverage, debt to capital, fixed charge coverage, and debt to EBITDA. Ratios to evaluate operating efficiency include accounts payable and receivable days inventory turnover, net asset turnover, and total asset turnover.
Using these financial ratios, analysts determine a company’s efficiency in generating revenue and the speed at which it sells inventory. Financial spreading involves deriving these financial ratios from balance sheets and comparing them with past financial performance to assess a business’s leverage and solvency.
Cash Flow Statement Spreading
After analyzing the income statements and balance sheets, they evaluate a company’s cash flow statement, which has the potential to tell a lot about a business. Primarily, it helps understand the cash outflows and inflows during a particular period.
The cash flow statement has three main components: cash from investments, operations, and financing. Each piece highlights a unique part of the business sources and cash uses, enabling analysts to evaluate performance over time. Many investors quickly analyze this section to assess a company’s financial performance, profitability, and funding requirements.
Profitability and Return Spreading
Analyzing this part of a financial statement unlocks several financial performance drivers. It involves looking at several crucial ratios, helping analysts determine a business’s efficiency, profitability, and leverage drivers. It aims at deriving key insights, including return on equity ratio, Dupont analysis, rates of return analysis, etc. Analyzing these ratios gives a solid understanding of a company’s finances.
Financial spreading is the most authentic and direct way of identifying a company’s profitability and financial performance patterns. Consequently, it is a critical parameter banks consider while conducting credit analysis. The spread also reveals a company’s budgets, based on which the analysts can assess its future planning and decision-making power. Ready for a faster method of spreading financial statements? Use technology and automate the process to get better results.

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