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Concept
Financial analysis
Summary
Financial analysis (also known as financial statement analysis, accounting analysis, or analysis of finance) refers to an assessment of the viability, stability, and profitability of a business, sub-business or project.
It is performed by professionals who prepare reports using ratios and other techniques, that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.
Financial analysis may determine if a business will:
Continue or discontinue its main operation or part of its business;
Make or purchase certain materials in the manufacture of its product;
Acquire or rent/lease certain machineries and equipment in the production of its goods;
Issue shares or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;
Make other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.
Financial analysts often assess the following elements of a firm:
Profitability - its ability to earn income and sustain growth in both the short- and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;
Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;
Stability - the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.
Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.
Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.
Official source
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