Understanding legal financial analysis is indispensable for companies. This vital approach opens new horizons into the financial status and future directions of businesses. By adopting financial strategies built on legal compliance, companies can achieve stability and success in the thriving Saudi business arena.

Legal financial analysis tools allow companies to deeply comprehend their financial performance and offer a comprehensive assessment of risks and opportunities. However, this isn’t all; it also aids in proper compliance with tax regulations and financial laws, safeguarding them from legal issues and penalties.

This tool constitutes an essential part of companies’ journey towards sustainability, expansion decisions, investment opportunities, and prosperity in the Saudi business market, serving as the vital point that securely defines their financial and legal course.

In this article, we will delve into the significance of legal financial analysis for companies in Saudi Arabia, elucidating how it contributes to understanding the financial landscape. Additionally, we will explore deeply the positive impact of adopting compliance strategies on the success of businesses in the advanced Saudi commercial environment.

Definition of Financial Analysis

It is a process of investigating and evaluating the financial status of companies or institutions using specific financial standards and laws. The purpose of this analysis is to examine financial figures in a legal and precise manner to ensure companies comply with the financial laws and regulations applicable in the country, such as tax regulations, accounting standards, and financial laws.

The financial analysis aims to provide an accurate and comprehensive assessment of the company’s financial performance and compliance with financial and tax laws. This analysis helps companies scrutinize financial data in a detailed way to understand strengths, and weaknesses, and identify potential risks. Additionally, it aids in making sound financial strategic decisions and ensures the implementation of financial policies and procedures by the prevailing laws and regulations.

The Importance and Objectives of Legal Financial Analysis

  • Financial performance evaluation involves examining the company’s financial figures and data such as revenues, costs, and profits to understand how the company has been performing over time. 
  • Financial analysis aids leaders in making strategic decisions regarding future investments, expansion, or altering strategies to ensure the company’s success. 
  • Identifying strengths and weaknesses helps financial analysis pinpoint areas where the company thrives and those needing improvement to enhance overall performance. 
  • Financial analysis works on identifying, managing, and evaluating potential financial risks, enabling the company to plan for handling them. 
  • Attracting investments and building trust through accurate and stringent financial reporting helps appeal to shareholders and investors. 
  • Compliance with laws and regulations is facilitated by financial analysis, ensuring the company adheres to financial laws, tax regulations, and other official mandates. 
  • Financial analysis is considered a cornerstone for sustainable growth and continuity in business by comprehending funding sources and using them efficiently.

Legal Financial analysis serves as a compass for businesses, guiding them through decision-making processes, uncovering potential risks and opportunities, and ensuring a sustainable financial trajectory for long-term growth and stability.

Types of Financial Analysis

  • Vertical analysis

It`s a financial assessment method that entails dissecting different elements within the income statement and presenting them as a percentage of the revenue. To ensure its effectiveness, these outcomes should be compared to those of similar companies in the industry, providing insights into the company’s performance.

Referred to as a common-sized income statement, this approach facilitates comparisons between companies of varying scales. Instead of focusing on monetary figures, analysts evaluate margins, enabling a more equitable assessment across different company sizes.

  • Horizontal analysis

It delves into multiple years of financial data, examining their inter-year comparisons to ascertain growth rates. This method aids analysts in deciphering whether a company is ascending or descending, highlighting pivotal trends within the data.

In the construction of financial models, the norm is to incorporate a minimum of three years of historical financial data and extend projections to five years ahead. This compilation yields over eight years of data, empowering a robust trend analysis that can be cross-referenced with industry peers.

  • Profitability analysis 

It involves assessing a business’s ability to generate profits relative to its expenses. It’s the examination or computation of a company’s earnings, aiming to pinpoint revenue sources and areas where cost reduction can maximize profitability. Embedded within Enterprise Resource Planning (ERP), profitability analysis streamlines and unifies daily business functions. Within ERP, it dissects profits stemming from various business facets such as clientele, merchandise, or services. This analytical process provides both quantitative and qualitative insights, enabling stakeholders to appraise the components contributing to the company’s profits.

  • Liquidity analysis 

It involves assessing a company’s capacity to fulfill its short-term financial obligations, typically those due within a year. It revolves around scrutinizing the balance sheet to gauge the availability of liquid assets that can cover immediate liabilities. Common liquidity ratios utilized in this analysis encompass the current ratio, acid test (or quick ratio), cash ratio, and net working capital.

The current ratio measures a company’s ability to settle short-term liabilities using its short-term assets, providing a broader view of overall liquidity. Meanwhile, the acid test focuses on more liquid assets (like cash and equivalents) to promptly cover immediate obligations, excluding less liquid assets like inventory. The cash ratio specifically pinpoints a company’s capacity to cover immediate liabilities with its available cash and cash equivalents.

Moreover, net working capital calculates the difference between a company’s current assets and current liabilities, indicating whether it possesses enough short-term assets to cover short-term debts.

Beyond these standard measures, liquidity analysis extends to qualitative assessments, considering factors such as the efficiency of cash flow management, access to credit lines, and the nature of current assets concerning their ability to be swiftly converted into cash.

This analysis is crucial for businesses to ensure they have enough liquid resources to honor their financial commitments, avoid potential cash flow crises, and maintain operational stability, especially during uncertain economic periods. It helps in strategic decision-making concerning investment, debt management, and overall financial health.

  • Trend analysis 

It stands as a crucial facet of legal financial analysis, focusing on the examination of historical data to identify patterns, tendencies, and directional shifts in financial metrics over time. This method involves scrutinizing financial statements, ratios, or market indicators to discern consistent trends or fluctuations, enabling analysts to forecast potential future outcomes or trajectories. 

By assessing these trends, analysts gain valuable insights into a company’s performance, market behavior, and potential areas of growth or risk. Trend analysis assists in making informed decisions by providing a deeper understanding of a company’s historical financial performance, aiding in strategic planning and risk management for both short-term tactics and long-term strategies.

Tools of Legal Financial Analysis

Analyzing financial statements involves a toolkit of methods designed to unveil crucial insights into a company’s performance. Here are some commonly utilized tools:

  • Comparative Statements: These reveal the financial state and profitability of a business across different periods, offering a comparative view. Typically, this encompasses the comparison of vital financial statements like the profit and loss statement and balance sheet. Comparative figures shed light on trends and directions in financial performance, often termed as ‘horizontal analysis.’

  • Common Size Statements: These statements illustrate the relationship between various items within a financial statement and a standard item by expressing each element as a percentage of that standard. They enable analysts to compare the financial structures and operations of different-sized enterprises within the same industry a method also known as ‘vertical analysis.’

  • Cash Flow Analysis: This delves into the actual cash movements into and out of a company. Cash inflow signifies cash entering the business, while outflow represents cash leaving. The disparity between these net cash flows accounts for changes in a company’s cash position between two balance sheet dates.

  • Ratio Analysis: This method examines the essential connections between items in a balance sheet and income statement. Ratios, as a tool for financial analysis, gauge the relative significance of individual components in financial statements. Through ratio analysis, one can assess a company’s solvency, efficiency, and profitability.

5 Steps To Do Legal Financial Analysis

Performing legal financial analysis involves a strategic process encompassing five key steps:

  • Comparative Analysis of Projected vs. Actual Monthly Outcomes

Initiating financial assessments through regular reviews is beneficial. However, a deeper analysis involves comparing anticipated forecasts with actual results. This comparative review, by aligning monthly plans with accounting software reports, facilitates tracking progress and identifying areas necessitating improvement.

  • Recognition of Surpassing Projections or Deviations from Expected Performance

Forecasting entails making informed estimations, yet actual performance may deviate. Recognizing whether the business surpassed projections or veered off-course from expectations is crucial. This insight allows corrective measures and adjustments in strategies based on the performance.

  • Evaluation of Revenue and Expenditure

The profit and loss statement offers a snapshot of a company’s financial health. By juxtaposing this statement with forecasts, businesses gauge goal achievements, sales targets reached, and adherence to budgeted expenses. This analysis forms the bedrock for informed decisions and fostering business advancement.

  • Examination of Cash Flow Statements

Understanding the flow of cash in and out of the business is pivotal. Comparing actual cash flow with projected forecasts aids in identifying alignment or discrepancies. This scrutiny empowers corrective actions when needed, guiding businesses to adhere to their planned financial growth.

  • Examination of the Balance Sheet

The comprehensive insight provided by the balance sheet, encompassing assets and liabilities, offers a panoramic view of a company’s financial standing. Businesses, through this analysis, gauge whether they are maintaining an appropriate rate of revenue collection from clients and managing debt as planned.

In summary, legal financial analysis serves as the cornerstone for determining a company’s enduring financial well-being. These five steps enable businesses to conduct a thorough review of financial statements, monitor progress, and make well-informed decisions that propel growth and ensure profitability.


In Conclusion,

Financial analysis stands as a robust foundation for a profound understanding of corporate performance and making informed strategic decisions. The diversity in analytical methods grants us deep insights into financial data, enhancing our ability to predict and plan effectively.

If you’re seeking a specialized financial or legal consultation or aiming for a meticulous review of your financial statements, Khalid Hawsawi CPA Co. is ready to assist. Contact us now for a comprehensive consultation of legal financial analysis that will support the success of your business endeavors. We’ll be delighted to assist you in achieving your corporate goals.