The Importance of Financial Statement Analysis

the importance of financial statement analysis

Financial Statement Analysis is the main process of analysing the financial statements of the companies that will help in the process of decision making. Many people including external stakeholders are using this, in order to understand the overall health status of an organization. It will also help in knowing the financial performance of the companies. Apart from that, this is also used by the internal people in monitoring the finances of the business which will manage further in the best way.   

 On another side, the financial statements of the companies will help in recoding the important data of financial nature. It will show them monitory performance in every aspect of the activities related to business. Business can be easily evaluated on the basis of current and projected performance. These financial statements are surrounded by GAAP principles that will require the companies in creating three types of financial statements. It includes a statement along with a cash and flow statement with a balance sheet. Private companies are following accrual or cash accounting.  

There are many different techniques that are used in financial statement analysis. It will include three main techniques of horizontal analysis along with vertical and ratio analysis. These data can be compared horizontally along with vertically. In ratio analysis, ratio metrics are used in calculating the relationship of statistical data. There are mainly three main financial statements that are interconnected with different views of different activities of the company’s performance. It helps in laying the foundation that will help in understanding other information.

 Balance sheet   

  • It is the main report of the company’s financial worth which is in terms of book value.  
  •  It mentions the company’s assets along with the liabilities and equity of the shareholders.  
  •  In assets, short term assets include cash along with account receivables will update you about the efficiency of the company.  
  • On the other side, liabilities include the main expenses of the company.  
  • Shareholders’ equity will cover down capital investments along with retained earnings that will prove better for the expansion of the business.  
  •  At last balance sheet of the company should have a tally where the assets and liabilities sides are equal.  

 Income statement  

  • This is also an important statement that will help in breaking down the different revenues which are earned by the business against such expenses that are included in the business.  
  • It helps in knowing the status of the company in terms of loss or profit.  
  •  It also has three main parts that will cover down revenues which is related to gross profit or gross loss.  
  •  It also has operating profit that helps in deducting the indirect expenses and other costs.  
  •  When you deduct interest and taxes, it will result in net income.  

Cash flow statement   

  • This statement helps in showing the cash position of an organization related to cash from the operating system along with investment and cash flow armament.  
  •  In this net income is also moving with cash flow statements.  
  •  It will include financial activities that have a separate section of cash flow that is from debt along with equity  

Why is there a need for financial statement analysis?  

Financial statement analysis helps in the evaluation of a company’s performance along with its value through the balance sheet, income and cash flow statement. With the help of horizontal along with ratio analysis, you will draw a clear picture of the company’s profile in terms of financial nature. These statements are used by the creditors who have lent funds to the company. On the other side, it mentions the current and prospective investors who are keen on examining the financial statements which will further result in the generation of cash flow. Management of the company is also engaged in ongoing analysis that will result in profit or loss in the business.  

 The final takeaway from financial statement analysis  

  • The main purpose of finical reports is to provide the main information about the company’s data along with financial position and performance.  
  • It will give you a clear picture of the company’s profit or loss at the end of the given period after taking all the items that come under different heads.  
  •  The income statement will help in showing the information on financial results. It includes all the important aspects of income stamen that will change the owner’s equity and will exclude the transactions with the owners. If there is a change in owners’ equity then information is provided for the increase and decrease of their components.  
  • It can be done in main steps that include:  
  1. The main purpose along with the context of the analysis.  
  1.  It will include the data that needs to be input.  
  1.  The data in the process form  
  1. Analysis and interpretation of data that has been processed.  
  1.  Follow up should be done properly.  

The financial statement analysis used by Perfios is to evaluate the company’s ability that will help in earning a return on the capital along with making least equal the cost of the capital that will generate further in generating more cash to the concern.   

The different aspects of financial statement analysis prove fruitful for the business in many ways. There are many options in this field where your major task of the business can be solved in the per You will also come across with many companies that are offering this facility at a reasonable rate as your entire task is being performed in a systematic and timely manner.   

If there is a profit margin in the business then, it will also show the company’s performance. The financial statement analysis conducted by Perfios makes the business owner aware of the company’s profit or loss at the end of the financial year.