Financial statements provide a picture of the performance, financial position, and cash flows of a

business. These documents are used by the investment community, lenders, creditors, and management
to evaluate an entity.

Summary

To summarize, financial statement analysis is concerned with analyzing the balance sheet and the
income statement of a business to interpret the business and financial ratios of a business for financial
representations, business evaluation, in addition to financial forecasting.

Understanding Financial Analysis

Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for
business activity, and identify projects or companies for investment. This is done through the synthesis
of financial numbers and data. A financial analyst will thoroughly examine a company's financial
statements—the income statement, balance sheet, and cash flow statement. Financial analysis can be
conducted in both corporate finance and investment finance settings.

Financial analysis is an aspect of the overall business finance function that involves examining historical
data to gain information about the current and future financial health of a company. Financial analysis
can be applied in a wide variety of situations to give business managers the information they need to
make critical decisions. The ability to understand financial data is essential for any business manager.
Finance is the language of business. Business goals and objectives are set in financial terms and their
outcomes are measured in financial terms. Among the skills required to understand and manage a
business is fluency in the language of finance—the ability to read and understand financial data as well
as present information in the form of financial reports.

Finally, finance involves analyzing the data contained in financial statements in order to provide valuable
information for management decisions. In this way, financial analysis is only one part of the overall
function of finance, but it is a very important one. A company's accounts and statements contain a great
deal of information. Discovering the full meaning contained in the statements is at the heart of financial
analysis. Understanding how accounts relate to one another is part of financial analysis. Another part of
financial analysis involves using the numerical data contained in company statements to uncover
patterns of activity that may not be apparent on the surface.

Financial analysis is an important aspect in maintaining a successful business. Analysis, when done
properly allows a company to better pinpoint problem aspects of the business. The company can then
take corrective action to alleviate or mitigate the problem aspects of the business. Aspects such as
return on assets, return on equity, net income, and the quick ratio are all aspects needed to help the
business function properly. Depending on the nature of the business, each metric will vary in its
importance.
Financial statement analysis objectives

1. Reviewing the company’s performance over past periods. Building the trend lines, calculating ratios
and indicators with the use of the company’s past financial report is a key to making conclusions on its
possible future performance. For creditors and investors reviewing the profitability, activity and liquidity
ratios from previous periods can be a base for consideration of their further cooperation with a firm,
while for the company managers it may be a reason for some serious economic decisions.

2. Assessing the current financial position. Analyzing company’s current balance sheet and income
statement is the most effective way to estimate the condition of a company here and now. Reviewing
firm’s assets and liabilities, checking the profitability margins for the current period is necessary for all
the users in terms of operative and long-term decision-making.

3. Forecasting the profitability trends. As the main goal of every business is the generation of revenue
for its owners and investors, planning the company’s cash flows and using analytical methods of
forecasting the profitability is highly important for every user of financial analysis. Profitability forecast is
a strong base for investors’ consideration of the alternative ways of using their funds.

4. Forecasting financial failure. One of the most important assumptions that can be made during the
analysis of the company’s financial report is measuring a chance of its possible bankruptcy. This factor is
vital to a business, and thus, should be under a tight control of company’s management, while for
investors and creditors financial distress forecasts work as a warning sign.

Conclusion

Analyzing the financial report of the company is a mandatory activity for each party, currently or
potentially involved in its activity. Company’s statements indicate facts and trends, which should cause
awareness of the business’ management, as well as of its creditors and investors.