What is Financial Analysis?
Financial analysis is a critical process that evaluates a company's financial statements and performance indicators to support informed decision-making for the future. For investors, businesses, and finance professionals, financial analysis is the most effective way to minimize risks, identify opportunities, and make sound investment decisions.
Types of Financial Analysis
Financial analysis can be conducted using different approaches, each providing a unique perspective:
Fundamental Analysis: Evaluates the company’s financial reports such as the income statement, balance sheet, and cash flow statement.
Technical Analysis: Focuses on predicting future trends by examining historical price movements of stocks, currencies, commodities, and other investment instruments.
Comprehensive Comparative Analysis: Compares the company’s performance against industry averages, competitor data, and market trends to determine its market position.
Why is Financial Analysis Important?
Financial analysis ensures that investment decisions are based on solid foundations. Key benefits include:
Reducing investment risks.
Revealing the company’s profitability and growth potential.
Shaping investors’ long-term strategies.
Providing guidance on financial sustainability.
Key Indicators Used in Financial Analysis
The main indicators used to measure a company’s financial health include:
Liquidity Ratios: Indicate the company’s ability to meet short-term obligations.
Profitability Ratios: Show how efficiently the company operates.
Leverage Ratios: Measure the level of financial risk.
Market Valuation Ratios: Reflect investors’ confidence in the company.