Mercy the Financial Analyst

Before you and I can do any analysis, we need to understand what financial analysis is, its definition, its importance, and its benefit. So before we start off, let us define what financial analysis is.

Definition

According to Investopedia financial analysis, is 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 CFA Institute defines financial analysis as the use of financial statements to make decisions about a company. It is important to note that for you to make any financial analysis, there has to be financial reporting by the company. Financial reporting, on the other hand, is referred to the way companies present their information to their stakeholders, ranging from clients to the public. Once a company presents its financial reporting, we can then use that information to analyze the company, leading to the making of informed decisions. This then leads to the question, what is the importance of financial analysis?

The Importance of Financial Analysis.

Why then do we perform financial analysis? Why go through the hustle?

• Plans, decisions, and management

Financial statement analysis is essential for a company’s decisions, planning, and management. As a result, the company management makes smart and intelligent calls on investment plans. These are backed by data analytics when planning for a bright future and maximum profits accrual. Analyzing the financial statements enables companies to make informed decisions rather than rely on chance. It gives you some form of confidence in the future.

For shareholders and investors, financial analysis enables them to make informed decisions on whether to continue or halt their investment. When the financial analysis is performed, investors gain confidence in their investment if the analysis presents a favorable report or vice versa. So it is essential to know how to perform financial analysis as an investor. Thus, compared to statements in the recent past, the future goals and predicted performances are endemic to the decision-making of shareholders, companies, and analysts.

• Providing credit

Shareholders offer loans to the company as its capital. The decision to provide and extend capital credit is based on the analysis of the financial statements. The analysis is performed over a period of time. All capital loans carry an interest rate and determine the best rate. They are also a part of the decision process in making credit loans to companies. This means that before investors or other financial institutions can give loans and funds to a company, they have to analyze the company’s financial statements. After all, no one wants to make poor investments or lose their money. Investors with surplus investable capital always look for opportunities to place their funds as investments in profitable and profit-potential companies. Before investing in such capital funds, investors look at past performance and predicted profits.