What is the Importance of Financial Analysis? (2024)

• Imarticus
• April 15, 2024

What is financial analysis? - In simple words, the Financial statements analysis is the process of reviewing and analysing a company's financial statements to make better economic decisions. In other words, financial analysis is the process of determining the financial strengths and weaknesses of the entity by establishing the strategic relationship between the items on the balance sheet, profit and loss account, and other financial statements.

Importance of Financial Analysis

The importance of financial analysis cannot be overstated. It serves as the bedrock for understanding a company's financial health, revealing its strengths, weaknesses, and potential opportunities. Financial analysis helps the company understand its financial condition. It is also useful to learn the creditworthiness, profitability, and ability to generate wealth. Therefore, it gives a more in-depth look at how well it operates internally.

The analysis of financial statements is crucial for the following reasons.

• The shares investment and holding

Shareholders own the company; such investments happen with repeated transfers and shares. Time and again, they may have to decide on whether to continue based on the price, profit, and reliability factors. This is where the importance of financial analysis comes into the picture. Therefore, a company's analysis of the financial statement is crucial to making decisions. As it reflects all information that is meaningful to the shareholder's decision process.

• 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.

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

This signifies the importance of financial analysis in its own way. Shareholders offer loans to the company as its capital. The decision to provide and extend capital credit is based on a financial examination. The examination is based on the company's financial statements and performance over 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.

• Decisions on investments

Investors with surplus investable capital always look for opportunities to place their funds as investments in profitable and profit-potential companies. Before investing such capital funds, investors look at the past performance and predicted profits.

Why conduct a financial analysis of your company?

Financial analysis is used to evaluate businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is done to analyse whether an entity is stable, solvent, or liquid. It also checks the profitability to warrant a monetary investment.

What is the role of a financial analyst?

The financial analyst's job is to use the company's financial statement data and records. They analyse them and understand the company's strengths, financial position, and weaknesses. You need to have certain skills required for being a Financial Analyst.

How to do a financial analysis of a company?

Check the financial statements

A company's balance sheets and income statement reflect the profits, losses, and earning potential over a given period. The liabilities, assets, capital, debt positions, and such financial data are vital to budget, plan, and ensure profitability.

• Capital statement

Current assets, liabilities, and working capital statements of the previous and present year help track the expenses and working capital changes. This is a helpful factor in budgeting, evaluation, and strategy planning.

• Comparative statements

Size-revealing statements of multiple companies help one understand and compare the current position against the others in the industry.

• Analysis of ratios

This method is helpful in asset management, liquidity, debt management, market value, the financial performance of the various departments, and profitability of the business parts.

• Financial analysis tools

One can’t discuss the importance of financial analysis without disucssing the associated tools. Data is the foundational backbone of the analysis. 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. In addition, tools should have the potential to give a clear, concise, and personalised analysis.

What software tools are used by financial analysts?

• Investors prefer the stock screener by finviz and customised financial analysis by the big bench. On the other hand, accountants, bookkeepers, and managers/analysts favor 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. And, 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. It helps to assess the current position, capital financing, analysis of specific firm processes, performance history, and operating income.
• Prevision's EPM financial reporting is also widely used and rated as a good tool for enterprise management. It is also used in the 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 customisable financial analysis and include statistical analysis accounting tools in their sophisticated software. It is an excellent tool for analysts, traders, and programmers.

Key take away

To make a career in financial analysis, then the financial analysis course at Imarticus Learning can help you. You can learn the best tools for assessing the company's financials, weaknesses, reliability, profit potential, and financial strength.

Imarticus Learning's course is particularly advantageous to career-makers. As it includes the certification, robust global curriculum, and an industry-relevant project involving real-time live data. In addition, hands-on practice on popular tools, and excellent industry-relevant mentorship kick-starts your career from day one.

Conclusion

In essence, the importance of financial analysis cannot be overstated. By meticulously analyzing financial statements, stakeholders gain crucial insights into a company's financial health, guiding decisions on investments, credit, and strategy. Equipped with essential skills and advanced tools, financial analysts play a pivotal role in driving informed decision-making for sustainable growth. Imarticus Learning offers a comprehensive course to equip aspiring analysts with expertise and tools for a rewarding career in financial analysis.

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