Financial statement analysis is the process that includes analyzing and reviewing financial statements of the company that may help the company to take financial decisions for the future.
These statements are prepared every year and are based on assets, liabilities and expenses incurred by the company. The analysis includes crucial analysis of all the statements i.e. balance sheet, change in equity and all other cash flows statements.
The analysis is done through various processes to avoid confusion and measure the financial health performance of the company. The financial analysis is done by investors, stakeholders, managers and other interested parties in the company.
The simple answer to the question, “why the financial statement is important?” is that all the past current transactions and investments of the company are measured in order to secure the projected performance of the company.
There are different techniques used to measure financial statement which is as follow:
- Horizontal analysis
This type of analysis includes a comparison of financial data of two or more years based upon dollar and percentage from.
- Vertical analysis
All the information in vertical analysis is created categorically based upon the balance sheet and shown in the percentage of the total account.
- Ratio analysis
This kind of analysis helps the company to calculate its statistical relationship between the data created.
Financial statement as a part
The financial statement is the formal presentation of information in a certain manner that makes it easier to understand for the analyst of the company for future reference. The type of statements or documents that are included in the financial statement are as follow:
- Balance sheet
- Cash flow statement
- Income tax statement
- Change in equity
The only purpose of financial statements is to measure the liquidity, asset holding and financial health of the company. People who are interested and financial statements are as follow:
Professionals prepare financial statements to summarise the financial status of the company so that the investors won’t invest in a company that is not fruitful in the future.
- Owner or manager of companies
Owners on the manager of the company prepare financial statements to overview the financial growth of the company to achieve organizational goals.
- Employees for collective bargaining
Employees are the heads of trade unions who used these financial statements for collective bargaining where the issues regarding compensation and promotions are settled between employer and employee.
- Financial Institutions i.e. banks
Financial statements are used by banks to analyze the financial status of the company as it depends upon the financial status that the loan is to be passed or not. The mere granting loans are not the only job for banks as they have to look into the repayment capacity of the company too.
The government bound every company to prepare its financial statement even it has incurred profit or not that year. Thus, non-profit organizations are bounded under this rule.
What is Analysis?
As we have discussed the financial statement above there is no need to explain the concept of financial statement again. We should directly jump on the analysis.
Financial statement analysis is a simple concept where the financial statement of one company is compared with another company in order to measure the financial status, growth, health and performance of the company in which an individual wants to invest.
It is very important to analyze the financial status of the company before investing as you must not end up wasting your money. The main and foremost step of investing is analyzing.
It totally depends upon the person that what method one may choose to analyze the financial statements of the companies.
The common method used to analyze a financial statement is fundamental analysis, DuPont analysis, horizontal and vertical analysis.
What are the questions to be settled with financial statement analysis?
- Identification of Strategies
It is very important for an investor to analyze this strategy followed by the company. The strategy here means the geographical distribution, diversification of products.
- Current Profit and Risk Policy
A company incurs profits only when it takes a risk but sometimes a high degree of risk may attract huge losses to the company. Therefore, it is very important to understand the risk policy before investing in a company.
- Companies Valuation
With the help of cash flow statements, the investors analyze inflow and outflow assets and liability in terms of a monetary transaction or other.
In this world, it is very hard to trust anyone as there are many instances in the history where analysts of the company have manipulated financial statements for lifting investments.
The investor must scrutinize those financial statements before relying on them completely.
I hope that the above article has cleared the concept of financial statement analysis to some extent in your head for future references.