FINANCIAL STATEMENT ANALYSIS & ITS

IMPORTANCE

PRESENTED TO :-
Dr. Parveen Bharat
PRESENTED BY :-
(MBA - 1A)
Anjali(10)
Anurag(14)
Deepak(31)
Manisha(63)
 What is Financial Statement Analysis ?

 It is the process of analyzing a company`s financial statement for decision making purpose about the
business.
 It is used by external & internal stakeholder to understand the overall health of an organization and to
evaluate its financial performance and business value through a financial statement such as balance
sheet, income statement, statement of cashflow.
Objectives

 To know the current financial position of the organization.

 To evaluate the profitability of company.
 To predict the future performance of the company.
 To eliminating discrepancies if any exist.
 To compare the company to its competitors so as to determine its strength
weakness and area for improvement.
Type of Financial Statements
 Type of Financial Statements

 1) Balance sheet :- It`s a simple accounting of all the company`s assets , liabilities, and shareholder
equity. It give idea about how a company is performing and expect to perform in future.
Assets = liabilities + shareholder`s equity
Assets - Anything that a company own such as property, vehicle, patent, Trademark.
Liabilities - means money that a company owes to a debtor. Such as payroll expenses, debt payment,
Rent, tax & so on.
Shareholder`s Equity - generally refer to Net worth of a company. It reflect the amount of money that
would be left if all the assets were sold & all liabilities paid.
Type of Financial Statements

 2) Income statement :- A report that a company generate in order to

communicate how much money it has earned over a period of time. It include
Operating expenses, Depreciation, net income, profit margin. It generate either
Quarterly & Annually.

 3) Cash flow statement :- A report that detail how a company receive and spend
its cash. These are also called cash inflow and outflow. It reflect a company`s
ability to operate in both short-term & long-term. And it is used by investors,
creditors to determine the financial health of an organization.
Types of Financial Analysis
Types of Financial Analysis

(a) On the basis of Use

 1) Internal Analysis :- The process of evaluating a Company`s financial
performance and condition using its internal financial data. It is typically
conducted by management and internal stakeholders to identify areas for
improvement, forecast future performance.
 2) External Analysis :- The process of Evaluating a Company`s financial
performance and condition using published financial statements. It is generally
conducted by investors, creditors & external stakeholder to financial health of
organization.
Type of Financial Analysis

(b) On the basis of Working System

 1) Horizontal Analysis :- A method of financial Analysis in which financial
statement of business concern for different years are analyzed in horizontal form.
In this type of Analysis, data is presented in a column and data of two or more
years are compared mutually.
 2) Vertical Analysis :- A method of financial analysis in which each item of
financial statement is listed as a percentage of a base amount within a financial
statement. In this type of Analysis, financial data of given year are compared
with the predetermined base of the same year.
Type of Financial Analysis

(c) On basis of Time

 1) Short term Analysis :- In short term Analysis, short term solvency and
liquidity of a firm is measured.
 2) long term Analysis :- In long term Analysis, the profitability, long term
solvency capacity and stability of a business concerned is measured.
Type of Financial Analysis

(d) On the basis of Entities

 1) Inter firm Analysis :- Under inter firm Analysis, the profitability, financial
position, liquidity & productivity of two or more firm can be compared. With the
help of this analysis the strength and weakness of different firm may be
determined smoothly.
 2) Intra firm Analysis :- Under intra firm Analysis, different department of a
firm are compared at a certain period of time in respect of their performance.
Importance of Financial Statement Analysis

 To know the financial position of the organization.

 To formulate plans and policies for organization.
 To facilitate decision making.
 To provide financial information to the shareholder/ investor.
 To determine tax liabilities.
 To assess the profitability of the organization.
 To make comparison with the competitors.
 To evaluate a company`s liquidity.
Benefits

 Helpful to Evaluate past performance of business such as sales, cash flow,

income, return on investment etc.
 Indicate current financial position of a Company.
 Helps Management in future planning & Decision making.
 Helpful to determine Tax liabilities of companies.
 Helpful to prepare financial statement.
 Building confidence and trust in Investors by providing transparency and reliable
information.
 Assess the risk of investing in a company.
Limitation

 Based on historical financial figures.

 Focus on financial factors such as profitability, liquidity & solvency.
 Not consider Qualitative factors such as company`s management, its competitive
position.
 Consider only Quantitative data such as financial position.
 Analysis is time consuming and require specialized knowledge.
 No assessment of management ability.
 Not provide solution of the problem.