Financial Analysis
1. FINANCIAL ANALYSIS: WHAT IS IT?
Financial analysis can be defined as a process that evaluates businesses, budgets, projects, and entities for analysis purpose. This evaluation is done with the purpose of determining the suitability for investment by a business. Usually, the main purpose of financial analysis is to analyze the stability, solvency, liquidity, and profitability of a business.
The process of financial analysis is carried out by professionals who work by preparing reports with the help of ratios containing information from financial statements and other similar reports.
Goals and Objectives
The main objectives of financial analysis include:
* Solvency
One of the most important goals of financial analysis is to assess the ability of a business to pay back its debts (Short term and Long term) to its creditors. The liquidity of a business entity is reflected in its balance sheet. * Profitability
Another goal of financial analysis aims at assessing the profitability of a firm. Here, profitability refers to a firm’s ability to earn income and sustain its growth in both long-term and short-term. Statement of comprehensive income is used to determine the profitability of a company. Income statement provides other information as well like details of sources of income and expenses. * Liquidity
In addition to the aforesaid goals and objectives, a financial analysis reports about the firm’s ability to sustain positive cash flow in addition to satisfying current debts. Just like the solvency of a firm, the liquidity of a business firm is also indicted by its balance sheet. * Stability
Stability implies the ability of a business firm to maintain its existence in the long run. However, this stability should not include significant losses during the conduct of this business. The process of assessing the stability of a firm through financial analysis involves the use of the balance sheet as well as the income statement. Besides, other
Financial analysis can be defined as a process that evaluates businesses, budgets, projects, and entities for analysis purpose. This evaluation is done with the purpose of determining the suitability for investment by a business. Usually, the main purpose of financial analysis is to analyze the stability, solvency, liquidity, and profitability of a business.
The process of financial analysis is carried out by professionals who work by preparing reports with the help of ratios containing information from financial statements and other similar reports.
Goals and Objectives
The main objectives of financial analysis include:
* Solvency
One of the most important goals of financial analysis is to assess the ability of a business to pay back its debts (Short term and Long term) to its creditors. The liquidity of a business entity is reflected in its balance sheet. * Profitability
Another goal of financial analysis aims at assessing the profitability of a firm. Here, profitability refers to a firm’s ability to earn income and sustain its growth in both long-term and short-term. Statement of comprehensive income is used to determine the profitability of a company. Income statement provides other information as well like details of sources of income and expenses. * Liquidity
In addition to the aforesaid goals and objectives, a financial analysis reports about the firm’s ability to sustain positive cash flow in addition to satisfying current debts. Just like the solvency of a firm, the liquidity of a business firm is also indicted by its balance sheet. * Stability
Stability implies the ability of a business firm to maintain its existence in the long run. However, this stability should not include significant losses during the conduct of this business. The process of assessing the stability of a firm through financial analysis involves the use of the balance sheet as well as the income statement. Besides, other