Analyzing Financial Statements: A Key Skill in Finance
by Yuvi K - December 16, 2023
Analyzing Financial Statements: A Key Skill in Finance
Financial statements like balance sheet, profit & loss account and cash flow statement provide the financial position of a company along with its performance & liquidity position. Analyzing these statements is an important skill for anyone related to finance, whether you’re a student, an employee, freelancer, analyst, investor, Master of Business Administrator or company executive. Financial statement analysis (वित्तीय बिबरणी विश्लेषण) helps to make well-informed decisions.
Analyzing Financial Statements to Assess Business Performance & Funds Utilization
The purpose of analyzing financial statements is to identify financial strengths and weaknesses of a company. A investor or executive analyzes a balance sheet to understand the value of company’s assets or liabilities. At times, a company’s total liabilities may outstrip its total assets resulting in a negative enterprise value. This indicates large scale misuse of funds and indicates an overall concern.
Similarly, analyzing a profit and loss account can jointly analyze expenditure and operating income. This helps to identify the cost of manufacturing a particular good or service. It also helps to identify profitability and margin of the product or service. Thus financial statement analysis helps to assess the overall performance of an organization.
Analyzing Financial Statements to Assess Asset Utilization & Debt Management
The liquidity position of a company is important to measure the firms’ ability to meet day-to-day obligations. Analyzing a cash flow statement helps to identify current cash balances in an organization. It helps to identify inflows & outflows of cash in the organization. Analyzing the fund inflow & outflows helps to identify the utilization of the asset over a given period of time.
One can further identify the debt position of a company to know the portion of net income going towards debt servicing. This helps to understand whether the company is able to meet the repayment obligations or is indulging more into debt. Thus, analysis of cash flows helps to identify the liquidity position and asset utilization.
Analyzing Financial Statements to Accommodate Risk & Opportunity Management
Analyzing financial statements can help to identify areas where risk can be minimized. For example, an investor or an executive may identify the cash holdings of the company that are idle. If the cash holdings are more than a certain limit, investing cash in alternative securities can generate more returns for the company. This helps to minimize the risk associated with idle cash.
Similarly, analysis of financial statement can also help to identify areas of opportunities. For example, an executor may recognize a sudden increase in sales figures. This may help the executive to assess that a particular product, service or advertisement has been very successful. The executive may use this opportunity to create strategies around this success to generate more sales.
Analyzing Financial Statements: A Conclusion
Analyzing financial statement is an essential skill for anybody related to finance. Financial statements like Balance Sheet, Profit & Loss Account and Cash Flow Statement helps to identify financial position & performance of a company. Analysing financial statements helps to assess business performance & funds utilization & also helps to accommodate risk & opportunity management. Therefore, it can be concluded that financial statement analysis is an important skill in finance.
So whether you are an investor, executive, analyst or student; financial statement analysis is an essential skill to have in order to understand businesses better and make well-informed decisions.
