Introduction to Financial Analysis

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Introduction to Financial Analysis

Financial analysis is also known as the financial statement analysis or the accounting analysis or analysis of finance. The main use of this analysis is to assess the viability and stability followed by the profitability of the business organization or a project.

The estimation of the business in order to find out the profitability and show how good the company is working, this is known as the financial analysis. With the help of the financial analysis, the amount of liabilities, the strengths and the future growth of the company are reflected. There are many techniques and tools with the help of which the financial sustainability of the organization can be known. Financial analysis is a significant factor of all the commercial tasks. The financial analysis gives important information to the stakeholders and the lenders, that may have an effect on the prices of the stocks or interest rates. For the management, the financial analysis is very essential for the success of the company, as this will reflect the strengths and weaknesses that have a direct effect on the competitiveness of the market. A financial analysis is also a valuation of the value and the security of claims of the debtors against the assets and possessions of the company.

Financial analysis has four basic elements

The main object of the analysis is to review the profitability, solvency, liquidity and the stability of the project.

Profitability

Initially, at the time of conducting financial analysis, the profitability of the company is the first thing that is determined. The management finds out if the company has the capacity to incur revenue or not.

Solvency

Secondly, at the time of analyzing the financial records of the company, it is determined whether the company has any sort of arrears or liabilities. The main aim of the company is to find out whether the company is capable to meet the long-term financial obligations of the organization.

For determining the solvency, total assets are divided by the total amount of liabilities. If the outcome comes out to be one, it reflects that the company is solvent and if the result is less than one, the company is considered to be insolvent.

Liquidity

Next, comes the analyzation of the liquidity of the company. The people who perform the audit find out from the financial statements of the organization if the company has the tendency to hold the money in terms of cash or in monetary terms. This helps to know how easily the immediate expenses of the organization are met.

Stability

Almost all the business enterprises are the ones who don’t want to face any instability in their business, at the time of making plans for the future working of the organization. it is very important for the business to continue to stay stable in the market, as this will be helpful in facing challenges that may occur when the competitors attack the working.

Related article: Tools of Financial Analysis

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