Financial Statement Analysis is a method used by individuals and businesses to evaluate and interpret the data found in financial statements in order to make informed economic decisions. This analysis typically involves the examination of balance sheets, income statements, cash flow statements, and statements of shareholders’ equity.
The main goal is to understand the financial health of an entity and its performance over time. This can include analyzing profitability, liquidity, solvency, and efficiency through various ratios and metrics. For instance, profitability analysis might use ratios like Return on Equity (ROE) or Net Profit Margin, while liquidity might be evaluated with the Current Ratio or Quick Ratio.
Investors and analysts also look at trends within the financial data and compare them with industry standards or competitors to make assessments about a company’s competitive position. In essence, Financial Statement Analysis provides the tools to answer questions about a company’s financial well-being and prospects for future performance.
