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Financial analysis is the method of recognizing the financial powers and limitation of the firm by correctly establishing relationships among the items of the balance sheet and the profit and loss account. Financial analysis can be assumed by management of the firm, or by parties outside the firm, viz. creditors, owners, investors and many others. The nature of analysis will be different depending on an idea of the analyst.
Trade creditors are interested in firm's capability to meet their claims over a awfully short period of time. Their analysis will impound to the assessment of the firm liquidity position.
Suppliers of long-term debt, conversely, are concerned with the firm's long-term solvency and survival. They examine the firm's profitability over time, its capability to produce cash to be able to pay interest and pay back principal and the relationship among a variety of sources of funds (capital structure relationships). Long-term creditors do examine the historical financial statements, but they place more importance on the firm's projected or preformed, financial statements to make analysis regarding its future solvency and profitability.
Investors: - who have invested their money in the firm's shares are most anxieties about the firm's earnings. They restore more assurance in those firms that show stable growth in earnings. As such they focus on the analysis of the firm's present and future productivity. They are also concerned in the firm's financial structure to the extent it influences the firm's financial structure to the extent it authorities the firm's earnings skill and risk.
Management: - of the firm would be interested in all aspect of the financial analysis. It is there in general responsibility to see that the assets of the firm are used most efficiently and competently, and that the firm's financial condition is sound.
