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What is Financial Statement Analysis? What is the process?

To get to know-how regard financial statement analysis, one has to be very efficient in all financial terminologies and tools. Getting back to the mains, financial analysis/financial statement analysis all one term is defined as in broader terms as “A financial process used for evaluating a businesses, projects and budgets with respect to their stability, viability, solvency, liquidity or profitability, so as to safeguard the investors share of vested amount”. Thus in other terms it refers to as process of financial planning done to estimate the overall structure of an organization viz whether they are running in profit or loss. Financial Analysis is a key work and hence is assigned to such expert professionals and rational minded people who are untouched by bribes, scams etc, so as to enhance brand name in market. The financial statement analysis is done on basis of decisions made in following areas:

Continuing or discontinuation of main key areas or part of the business, Acquiring or renting machineries involved in production, Procurement of materials, issue of stocks or negotiating bank loans to increase working capital, investment of capital and considering other alternatives in carrying out business. The primary motive behind financial statement analysis are:

  • Profitability market: It relates to finding out the profit margins of firm based on income statement which is the operational report of company’s performance.
  • Solvency: This refers to company’s ability in order to clear out debts and whether company has enough cash reserves to provide assistance to creditors and other third parties in the long-term.
  • Liquidity: This refers to maintenance of positive cash flow or enough cash reserves for sustenance of business. In turn shown on balance sheet and forms as a proof regard the business condition.
  • Stability: It is self explanatory as it refers to as ability of an organization to perform consistently in a market and thereby attain sustainable profits in long and short run for good growth of company.

Now let us understand various methodologies adopted by analysts or working of Financial statement analysis. The analysts based on findings of companies on their present viz comparison of performance between similar trade, future performance viz in long run and short run and which include analysis of financial condition based on mathematical and statistical techniques, including present and future values for good projects and last but not the least the performance in the past viz last 5 years financial reports. The mathematical and statistical techniques involved are on basis of ratios derived from balance sheet or income statement of accounts and are as given below:

Here the Net Income/Equity per share is equal to Returns on equity, Net Income or total assets equals to return on assets and also Stock price or earnings per share equals price to earning ratio which is Equity per market share divided with annual earnings per share.

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