Financial Statement Analysis

Financial statement analysis is the are of transforming data of financial statements into meaningful information for the decision-making effort on a total basis. Financial statement analysis is the process that aims to evaluate the current and past financial positions and results of operations of an enterprise.

On the other hand, utilize an even more massive & more detailed financial database to assess, for internal management & control purposes, the current financial condition, and results of an enterprise.

Financial statement analysis is the art of transforming data of financial statements on a total basis.

The user of financial data are;

1. Credit grantor,
2. Equity investor,
3. Management,
4. Acquisition & merger analyst,
5. Auditor,
6. Other interested groups,
   • Government.
   • Regulatory agent
   • SEC(Security & exchange committee)
   • Public
   • Standard

The user of financial data are given below:

• Credit Grantors: Credit grantors are lenders of funds to an enterprise. The fund is under funds and lent in many forms and for a variety of purposes. Trade creditors usually extend very short-term credit.
• Equity Investors: Equity interest in an enterprise is the supplier of its basic risk capital. The capital is exposed to all the risks of ownership and provides a cushion or shield.
  • Common stock valuation: The valuation of common stock is a complex procedure involving financial statement analysis.
  • Approaches to Common stock valuation: Most modem stock valuation techniques and models is present value theory.
  • Data required for stock valuation: The expected dividend stream in the future is dependent on earnings and dividend payout policy.
• Management
• Acquisition and merger analysis
• Auditors.

A major foundation of Financial Statement Analysis Discipline

The discipline of ‘financial statement analysis rests on two major foundations of knowledge:

1. The first foundation involves a thorough understanding of the accounting model as well as the language, the meaning, the significance & the limitations of financial communications, as most commonly reflected in published statements.
2. The second foundation, which inevitably builds on the first, consists of the mastery of the tools financial analysis utilizing which the most significant financial and operating factors and relationships can be identified and analyzed for purposes of reaching informed conclusions.

Tools of financial analysis means of which the most significant financial and operation.

• Liquidity,
• Ratio analysis,
• Cooperative balance sheet,
• Reaching informed.

Importance of Financial Statement Analysis: Why are Financial Statements Important to Decision Making Process in Financial Analysis?

The analysis of financial statements and data is an indispensable component of most lending, investing, and other related decisions. Financial statement analysis is the important thing for the decision-making process in financial analysis.

• The financial statement that plays in the equity investing decision is quite different. One important reason for this is that the equity investor looks for his reward in two different sources: (a) dividend, (b) capital appreciation.
• The investor decision set must include consideration of market psychology and confidence that are factors that are of great importance not subject to analysis- by use of the enterprise’s financial statement.
• Effective financial statement analysis” is critical to effective business management decision making. A business owner must pay close attention to numerical information included on the income statement and balance sheet to understand what is working and avoid spending money he doesn’t.
• Another financial statement important maybe need to the decision-making process is as follows:
  • Valuation techniques,
  • Effect ratio,
  • Causal analysis,
  • The user of financial statements,
  • Forecasting sustainable growth.

The analysis of financial statements and data is an indispensable component of most lending, investing, and other related decisions.

• The lending decision look’s mainly to the enterprise for his or her reward, which comes in the form of-
  • Interest,
  • Principle repayment.
• A decision set consists of the total of all factors in the making of a decision. Such as:
  • Management ability & integrity
  • Industry,
  • Board economic condition.
• While there may be wide agreement on what is included in a given decision set and what the relative importance of the various parts are, there will always be exceptions and differences of opinion.
• The investor decision set must include consideration of market psychology and confidence that are factors are of great importance not subject to analysis by use of the enterprise’s finances.
• The financial statement that plays in the equity investing decision is quite different. One important reason for this is that the equity investor looks for his reward from two different sources:
• Dividend,
• Capital appreciation.

Comparative Financial Analysis: How useful is a comparative financial analysis? How do you make a useful comparison?

The comparison of financial statements is accomplished by setting up balance sheets, income statements, or statements of cash flows (SCF), side by side, and reviewing the changes that have occurred in individual categories therein from year to year and over the years.

The comparative financial statement is a trend. The comparison of financial statements over a number of years well also reveals the direction, velocity, and amplitude of trends.

Comparative financial analysis is useful to financial analysis because;

• It is set or preparing balance sheets, income statements, cash flow statements of companies or firms.
• The comparative trend is identifying, current and future movements of an investment or group of investments.

Make Useful Comparison:

Comparison is a very important analytical process. It is based on the elementary proposition that no number standing by itself can be meaningful in financial analysis and that it gains meaning only when related to some other comparable quantity.

Means of comparison, financial analysis is useful in performing important evaluative, attention, directing, and control functions.

The comparison may be performed by using:

• A company’s own experience over the years.
• External data, such as comparisons with individual companies.
• Including standards, budgets, and forecasts.
• If the operating performance compares with the deviation.
• Comparison by the actual data with the expected data.