Financial Statement Analysis is the process of choosing, analyzing, and interpreting financial data along with other relevant information to support investment and financial decision-making.
Understanding the risk and profitability of a company (enterprise, sub-business, or project) by study of published financial information, notably yearly and quarterly reports, is known as financial statement analysis (or financial analysis).
The company’s own information from its annual report and other mandatory disclosures serves as the main source of information. The income statement, balance sheet, and statement of cash flows, together with any related footnotes, are included in the annual report. Securities regulations mandate further information disclosure for some companies.
Every day, the financial press and electronic media publish information such as the market values of the securities of publicly listed firms. The financial press also publishes stock price indices for certain industries and the market as a whole. Another type of information that may be used to evaluate the current success or future prospects of an organization or industry is economic statistics, such as the Gross Domestic Product and the Consumer Price Index.
In order to reach a conclusion, analysis includes creating a meaningful link between different components of the two financial statements. We refer to two statements that are normally generated at the conclusion of a certain time period as financial statements.
- Profit and loss Account or Income Statement
- Balance Sheet or Position Statement
The following are the primary goals of financial statement analysis:
- Choosing a Profitable Strategy
- Finding the Trend in Achievement
- Analyzing the Business’s Potential for Growth
- Positioning Comparatively to Other Firms
- Assess the Firm’s Financial Strength Overall
- Analyze the Solvency of the Firm
Financial Statement Analysis is to evaluate a company’s financial health and support management in comparing the profitability of comparable companies operating in related industries. This procedure gives enough details to show whether the company has room to expand. It is possible to compare financial accounts from prior years to spot trends in a variety of costs, purchases, sales, gross profits, and net profits, among other things. Financial analysis may be used to assess whether or not the firm is making enough money on the cash that has been put in it.
Financial Statement Analysis has gained significance as a result of the growing interest in a company unit’s financial performance.
The numerous stakeholders with an interest in financial statement analysis include the following:
- Fiscal and Governmental Authorities
- Management
- Investors
- labor unions
- Lenders
- Suppliers and creditors in trade
- Employees
- Stock Market
It aids Management in the preparation of budgets and the evaluation of the performance of various department heads. Trade unions are also interested in financial analysis in order to negotiate wage or salary agreements with management. This analysis informs investors about the company’s earning capacity and future growth prospects.
Various tools available in major ERP software, such as Fortuner from Fortune technology LLC, enable all parties associated with an organization to easily perform financial statement analysis to determine the company’s ability to meet debts as and when they fall due. The primary goal of financial statement analysis is to assist management in conducting a comparative analysis of the profitability of various firms engaged in similar businesses.