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Accounting For Managers - Ratio Analysis

Nature Of Financial Analysis

   Posted On :  26.01.2018 08:43 am

The focus of financial analysis is on the key figures contained in the financial statements and the significant relationship that exists between them. “analyzing financial statements is a process of evaluating the relationship between the component parts of the financial statements to obtain a better understanding of a firm’s position and performance”.

The type of relationship to be investigated depends upon the objective and purpose of evaluation. The purpose of evaluation of financial statements differs among various groups: creditors, shareholders, potential investors, management and so on. For example, short-term creditors are primarily interested in judging the firm’s ability to pay its currently-maturing obligations. The relevant information for them is the composition of the short-term (current) liabilities. The debenture-holders or financial institutions granting long-term loans would be concerned with examining the capital structures, past and projected earnings and changes in the financial position. The shareholders as well as potential investors would naturally be interested in the earnings per share and dividends per share as these factors are likely to have a significant bearing on the market price of shares. The management of the firms, in contrast, analyses the financial statements for self-evaluation and decision making.

 

The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step involved in financial analysis is to arrange the information in such a way as to highlight significant relationships. The final step is the interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation.

Tags : Accounting For Managers - Ratio Analysis
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