Financial Analysis
Financial analysis is a process by which an accountant or finance manager or any other interested party identifies the financial strength or position of a company by comparing the relationship between items in the balance sheet and those in the profit and loss account.
Thus financial analysis is of paramount importance to all parties with a financial stake in the company as they will use such analysis to gauge the profitability and safety of their stake in the company. These parties can be grouped into the following classes;
a) Shareholders who are the real owners of the company on credit
b) Creditors who supply goods to the company on credit
c) Lenders who supply the company with loan finance
d) Directors and management of the company
e) Potential investors who may want to invest in the company
f) The general public who may include customers
g) Competitors
h) The government
4.1 Ratio Analysis
Another way of avoiding the problems involved in comparing companies of different sizes financial ratios is used to calculate and compare financial ratios. Such ratios are ways of comparing and investigating the relationships between different pieces of financial information. We cover some of the more common ratios namely;
a) Short-term solvency, or liquidity, ratios
b) Long-term solvency, or financial leverage ratios
c) Asset management or turnover, ratios
d) Profitability ratios
