Definition
Financial analysis uses financial data to pinpoint a company’s strengths and weaknesses.
Financial analysis works with a company’s financials to determine its health, performance, and potential. This data, which comes from financial statements and other reports, is used by investors and companies to make strategic decisions. For outsiders, that could be deciding whether to buy shares in the company. For management, it could mean establishing how to run the business better and set goals.
Key Takeaways
- Financial analysis involves examining a company’s financial data to understand its health, performance, and potential and improve decision-making.
- Ratios are a key part of financial analysis and past data is used to make projections.
- Financial analysis helps management to better run companies and outside investors to determine whether a company makes a good investment.
- Common types of financial analysis include vertical and horizontal analysis, leverage analysis, liquidity analysis, and profitability analysis.
What Is Financial Analysis?
A company’s success is measured by its financials. Their accounts and statements contain a lot of information represented in figures. Financial analysis aims to turn these numbers into actionable intel.
Ratios are generally preferred over looking at individual numbers. Relationships between different pieces of financial data are explored by dividing one figure on a financial statement by another. The results can then be compared against the company’s historical performance or other companies.
Financial analysis also tries to be forward-thinking, which involves extrapolating from the data for projections.
Who Uses Financial Analysis?
Other than company leaders, many stakeholders—investors, investment analysts, lenders, and auditors—have an interest in financially analyzing a firm.
by investopedia.com
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