The key purposes of the financial statement analysis are to give information to the analysts and the decision makers (members of management) related to the business enterprise as this will help in the corrective and effective making of the decisions. The decision makers are mainly concerned with assessing the economic situation of the firm and then predictions are made related to the future working.
Following are the objectives of the financial statement analysis:
- Assessment of the past performance and the current position
By knowing the past performance of the organization, the future performance can be judged, by considering the past performance as an indicator for the future and the upcoming. Therefore, the investors and the stakeholders are more interested in knowing about the past sales, expenses, net incomes, cash flows and the returns on the investments with the help of which the future performance of the organization can be judged.
Alike, the current position of the organization can be analyzed that can help in knowing where the business stands in the market. With the help of analyzing the current position, the types of assets that are retained by the enterprise and the liabilities that are due against the business. The liquidity of the enterprise can be judged by this.
- Prediction of net incomes and growth aspects
The predictions related to the earning visions and the growth rates in the profitability can be made with the help of the financial statement analysis. These are used by the investors and other stakeholders at the time of comparison of the investment substitutions. This also gives a glimpse of the risk and the uncertainty in the business that the investors feel.
The decision makers work by keeping the future of the business in mind, as they are very futuristic. The financial records that have the data related to the performance of the organization in the past years are examined and understood to find out and forecast the rates of return in the future and also for studying the risk factors.
- Prediction of bankruptcy and failure
With the help of the financial statement analysis, the predictions can be made related to the bankruptcy and failure of the organization, and also the profitability of the business enterprise. When the managers and the investors come to know about the chances of the business organization to fail, certain measures are taken to minimize or eradicate the losses. Changes and alterations can be made in the corporate management in the operating strategy that is being followed, the financial structure can be reorganized or voluntary liquidation can opt in order to reduce the losses.
Financial ratios can be helpful in this case. A prediction model can be formed on the basis of the financial statement analysis that will be helpful for the managers, investors and the creditors. In order to know about the solvency position of the business, the ratio prediction model is assessed and hence, corrective decisions and actions are taken.
The prediction model can be used by the investors and the shareholders to make any sort of variations into the investment strategy that will further be related to the investment goals of the organization. the prediction model can further be useful for the creditors as they will be able to evaluate and know about the creditworthiness of the business enterprise.
- Loan decision by financial institutions and the banks
For making the loans or decisions related to the credibility, the financial statement analysis is helpful for the financial institutions, loaning agencies, banks, and the other associations. Appropriate distribution of the credit between the various borrowers of the company can be done in a proper way. By using the financial statement analysis, the credit risk can be determined and the terms and conditions of the loan sanctioned, the interest rate is decided.
Must read: Introduction to Financial Analysis