Using financial statement analysis, you can better assess the financial status of a company and project its future financial performance. This can help you make better economic and investment decisions.
Financial statement analysis is important in corporate finance and lending, as well as in corporate governance. It is used by investors, creditors, and company management to evaluate a company’s financial health and ability to generate dividends.
Financial statement analysis is also important for regulatory authorities. The Securities and Exchange Commission, for example, examines the financial statements of publicly held companies. It uses the information to assess a company’s financial performance and compliance with accounting standards.
Financial statement analysis is often performed in spreadsheet software. It is important to choose the right base year. This is because results from one year may be different from the next.
The most common form of financial statement analysis is ratio analysis. It involves comparing two periods of financial data. The most common ratios used for ratio analysis include leverage, liquidity, and profitability ratios. These ratios measure a company’s profitability and liquidity, and help ensure that an organization remains profitable and relevant.
Leverage ratios, for example, show whether or not a company has taken on too much debt. A higher leverage ratio means a higher risk for the borrower. Leverage ratios include debt-to-equity ratio and debt service coverage ratio.
Financial statement analysis is also useful for prospective investors. This is because it helps them decide whether to invest in a company.