In this short introduction, financial statement analysis will be defined and explained. It is one of the steps used in our review of a company’s potential when considering investment.
Financial Statement Analysis
Financial statement analysis is also referred to as ‘Quantitative Analysis’. It is one of the most important steps while analyzing a company from an investment perspective. Massive amounts of numbers in a financial statement analysis may bewilder or intimidate a novice investor. Financial ratio analysis enables an investor to understand these numbers in an organized fashion. Balance sheet, income statement and cash flow statements are the most important financial statements and if properly analyzed and interpreted can provide valuable insights into a company’s performance.
Financial ratios are used by both current and potential investors, creditors and financial institutions to identify the strengths and weaknesses of a business, and to justify investment in the business. Internally, managers use these ratios to monitor performance and to set specific goals, objectives, and policy initiatives. The following articles discuss some of the important financial ratios used in determining the value of investments. It also discusses the limitations of these ratios that every analyst should bear in mind before interpreting these ratios in financial statement analysis.
Financial Ratio Analysis
Financial ratio analysis is a study of ratios between various items in financial statements. It enables investors and analysts to spot trends in a business and to compare its performance with the average performance of similar businesses in the same industry. Ratios can be classified as profitability ratios, liquidity ratios, asset utilization ratios, leverage ratios and valuation ratios based on the indications they provide.