The process of examining the financial statements in order to assess a company’s performance and its financial position over time is called financial analysis.
Types of Analysis:
- It calls for the calculation of key ratios to uncover trends and make comparisons between firms’ performances.
- The evaluation of liquidity by studying cash inflows and outflows through operating, investing, and financing activities is what cash flow analysis entails.
- Unusual transactions that indicate fraud are examined in forensic accounting.
Example Application:
By closely studying rising receivables collection periods and inventory turnover ratios, the analyst flagged early warning signs of inefficiencies requiring the manufacturer’s attention.
Significance:
Prudent financial analysis aids decision makers in evaluating credit and default risk, investment potential, areas for improving profitability, and overall organizational health over short and long-term horizons.