Financial Analysis
Financial analysis, often referred to in accounting as the analysis of financial data or accounting analysis, is a crucial disciplinary term that reveals a company’s sustainability and stability, as well as the profitability it has achieved based on its operational activities. Financial professionals prepare financial reports relying on ratios derived from the data produced by financial statements and accounting reports. This process is essential for conducting a comprehensive evaluation of a company’s business activities or any related endeavors. Furthermore, it provides insights into risks and profitability through the examination of financial information, especially through financial audit reports and annual as well as seasonal reports. It is noteworthy that the financial analysis phase follows the financial audit phase, as it builds upon studying the financial reports prepared by the auditor to draw conclusions about them, thereby examining the investment project in all its production dimensions, which are derived from structured data, ratios, and statistics extracted from documented reports.
Objectives of Financial Analysis
The primary goals of financial analysis include:
- Assisting the financial auditor in deciding whether to continue with the main operational processes or to cease them.
- Enabling the auditor to make informed decisions regarding the ability to procure specific materials needed for product manufacturing.
- Facilitating decisions on whether to lease or purchase equipment.
- Determining a final decision on issuing shares to a bank or negotiating for the purpose of increasing working capital through acquiring a loan.
- Reaching a conclusive decision regarding lending capital or investing it.
Tools for Financial Analysis
The Techniques of Financial Statement Analysis involve the use of various analytical tools employed by the financial auditor to perform the accounting process. The choice of tools is based on the level of analysis required for the available accounting data, which includes:
- Horizontal Analysis: This method focuses on reviewing the changes occurring in the components of the financial statements over a specific financial period. The amounts and percentage changes are of primary interest to the financial auditor, who employs this comparative tool to measure the rates of change affecting the components over time, thus revealing analysis results and transformations.
- Vertical Analysis: Also known for its relative distribution of financial statement items, this technique emphasizes measuring the impact and existence of each item within the financial statement, concerning the overall value of that statement, serving as a primary method for evaluating the relative distribution of its components.
- Ratio Analysis: This is the most significant and commonly utilized tool in financial analysis among auditors. It emphasizes the use of financial ratios to assess relationships between components of financial statements and their respective values.