What is the Importance of Financial Analysis?
The process of reviewing and analyzing a company's financial statements to make better economic decisions is called the analysis of financial statements. In other words, the process of determining the financial strengths and weaknesses of the entity by establishing the strategic relationship between the items of the balance sheet, profit and loss account, and other financial statements.
Financial analysis is also defined as the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.
The financial analyst's job role is to use the company's financial statements data and records to analyze and understand the strengths, financial position, and weaknesses of the given company. For example, the revenue stream flow, debts being serviced, capital investments, operational efficiency, current financial position to invest, future profits, etc. in the form of presentable data to investors.
The following are essential to Financial analysis.
1. Financial statements:
The balance sheets and income statement of the company reflect the profits, losses and earning potential over a given period of time. The liabilities, assets, capital, and debt positions and such financial data are vital to budget, plan and ensure profitability.
2. Working Capital Statement:
All expenses and working capital changes can be tracked using the current assets, liabilities and working capital statements of the previous and present year. This is a helpful factor in budgeting, evaluation and strategy planning.
3. Comparative statements:
Size-revealing statements of multiple companies help one understand and compare the current position against the others in the industry.
4. Analysis of ratios:
This method is a great tool useful in asset management, liquidity, debt management, market value, the financial performance of the various departments, and profitability of the business parts.
Data is the foundational backbone of the analysis, and a lot depends on the inferences drawn from data in the financial records, the type of decision-making involved, and your analysis of financial information.
Using such parameters for constructive feedback and financial analysis makes the software a crucial tool that should have the potential to provide a clear, concise and personalised analysis.
Financial Analyst’s software:
Of the various Financial analysis software currently available, investors prefer the Stock Screener by Finviz and Customized Financial Analysis by BizBench. Accountants, bookkeepers and Managers/ Analysts favour SWOT analysis by providing software and cloud storage tools and software. The VBA macro tool in Microsoft Excel continues to be the foundational and most widely used tool for beginners, especially for those who use simple but effective solutions to function.
Management tools and cloud storage reporting software like Balanced Scorecard can help assess the overall returns, current position, capital financing, analysis of specific firm processes, performance history and operating income. Prevision's EPM Financial Reporting is also popular in use and rated as a good tool for enterprise management, maintenance of report-books/ accounts and for budget-analysis combined with real-time data from various IT departments.
QlikView, SAS, and MATLAB are preferred for customizable financial analysis and include statistical analysis accounting tools in their sophisticated software. It is a great tool for analysts, traders and programmers.
Importance Of Financial Statement Analysis:
The analysis of financial statements is crucial for the following reasons:
1. The shares investment and holding: The company is owned by its shareholders and repeated transfers and trading in shares happen with such investments. Time and again, they may have to make decisions on whether they have to continue with the based on the price, profit and reliability factors, among others. A company's analysis in the financial statement is crucial to making decisions since it reflects all information that is meaningful to the shareholder's decision process.
2. Plans, decisions and management:
Financial statement analysis is an important tool for the decisions, planning and management of any company. The company management undertakes the responsibility of making smart and intelligent calls formulated on investment plans backed by data analytics when planning for a bright future and maximum profits accrual.
Thus, in comparison to statements in the recent past, the future goals and predicted performances are endemic to the decision making of shareholders, company and analysts too.
3. Providing Credit: Shareholders offer loans to the company as its capital. The decision to offer and provide such capital credit is always based on the financial analysis of statements of the company and its performance over a few years. All capital loans carry an interest rate and determining the best rate is also a part of the decision process in making credit loans to companies.
4. Decisions on investments:
Investors with surplus investable capital always look for opportunities to place their funds as investments in profitable and profit-potential bearing companies. They look into the past performance and predicted profits of a company to determine its health and potential before investing such capital funds.
In conclusion, if you look to make a career in financial analysis, then the financial analysis course at Imarticus Learning can help teach you the best tools for assessing the company's financials, weaknesses, reliability, profit potential and financial strength.
The Imarticus course is particularly advantageous to career-makers because of the certification, global robust curriculum, and industry-relevant project involving real-time live data, hands-on practice on popular tools, and excellent industry-relevant mentorship which kick-starts your career from day one.