Financial Statement Analysis is the process of reviewing and analyzing a company’s financial statements in order to make better financial decisions for future earnings. These statements include income statements, balance sheets, cash flow statements, notes in accounts, and equity change statements (if applicable). Even the smallest business can benefit from the results of financial statement analysis as a guide for the business owner. Financial statement analysis is a method or process that involves specific strategies for assessing risk, performance, financial health, and future prospects of an organization.
Overall, a central focus of financial analysis is evaluating a company’s ability to earn a return on capital that is at least equal to the cost of that capital, profitably increase its operations, and generate enough cash to meet obligations and pursue opportunities. For example, equity investors are interested in the long-term earnings potential of the organization and perhaps the sustainability and growth of dividend payments. Lenders want to ensure interest and principal payments on the institution’s debt securities when arrears occur.
Basic financial analysis begins with the information found in a company’s financial report. These financial statements include audited financial statements, additional disclosures required by regulatory authorities and any accompanying (unaudited) commentary by management. Business owners can choose the level of detail they need to make good business decisions. If a business is held publicly, or if it is for sale, external parties, like investors, use the results of financial statement analysis to make their investment decisions. Common methods of financial statement analysis include fundamental analysis, Dupont analysis, horizontal and vertical analysis, and the use of financial ratios. Historical data combined with a series of financial data estimates and adjustments can be used to project future performance. The title Chartered Financial Analyst is available to professional financial analysts. Basic financial statement analysis as presented in this lesson provides a basis that enables analysts to better understand the information gathered from research outside of financial reporting.
