Technical Note
ESSENTIALS OF FINANCIAL STATEMENT ANALYSIS
INDUSTRY :-
AREA :ACCOUNTING & CONTROL
ORGANIZATION :-
LENGTH :26
LUMS No :01-004-2016-2
PUBLICATION YEAR : 2016
ABSTRACT:
The purpose of financial statement analysis is to help users make better business decisions. These users include both internal and external decision makers to the company. Managers or internal users want information to improve company efficiency and effectiveness in providing goods and services. They also need information to gauge how successfully the company has performed, not only relative to its own past performance but also relative to its competitors in the industry. External users, which include shareholders, lenders, directors, customers, suppliers, regulators, lawyers, and brokers, want information to assess the financial stability of the company for various reasons. All users of financial statements want information which would allow them to evaluate a company’s past and current performance based on which they could forecast future performance and mitigate risk attached to their own company as well as risk attached to their vendors, customers and business partners. Managers set goals related to various aspects of their businesses, ranging from cost cutting or revenue increase goals to achieving higher production efficiency goals. At the end of the year, to understand whether their set goals have been achieved, managers must use various techniques to analyze a company’s financial statements. This note will focus on four building blocks of ratio analysis: (1) liquidity and efficiency (2) solvency (3) profitability and (4) market prospects. In addition to the ratio analysis, this note will also discuss horizontal analysis—comparison of a company’s financial performance across time and vertical analysis—comparison of a company’s performance to a base amount.