Unit 45 financial analyses

Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.

§ Continue or discontinue its main operation or part of its business;

§ Make or purchase certain materials in the manufacture of its product;

§ Acquire or rent/lease certain machineries and equipment in the production of its goods;

§ Issue stocks or negotiate for a bank loan to increase its working capital;

§ Make decisions regarding investing or lending capital;

§ Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

GOALS

§ Financial analysts often assess the firm's:

§ 1. Profitability -its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;

§ 2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;

§ 3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;

§ Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.

§ 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators