Define Financial Analysis: Financial analysis is the process of evaluating financial and other information for decision-making.
According to Business Dictionary,
Financial Analysis is use and transformation of financial data into a form that can be used to monitor and evaluate the firm's financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio.
Assessment of the effectiveness with which funds (investment and debt) are employed in a firm, efficiency and profitability of its operations, and value and safety of debtors' claims against the firms assets.
Significance of Financial Analysis
To make comparison of a firm’s performance within the firm or with that of other firms in the same line of business.
To reveal its current strengths and weakness.
To show whether the firm’s performance is either improved or deteriorated.
To suggest actions that the firm might enact to take advantage of the strengths and correct the weakness in the future. Define Financial Analysis
Types of Financial Analysis
Fundamentals: This type deals with the forecast of any company, commodity, currency.
Technical: This type uses charts and past behavior.
Cycle: This type looks at the stage of the investment, is it in its growth stage or in its top.
Inter Market: This type looks at the effect if one thing on other investments.
Objectives of Financial Analysis
From the view points of Shareholders,
i) To judge the financial stability of an enterprise.
ii) To measure the enterprise's short-term and long-term solvency.
iii) To measure the enterprise's operating efficiency and profitability.
iv) To compare intra-firm position, inter-firm position and pattern position within industry.
v) To assess the future prospects of the enterprise.
Objectives from the view point of Lender,
i) To assess managerial Performance
ii) To assess the cash flow pattern
iii) To assess the economic performance
From the view point of Government,
To assess the contribution to society
To ascertain business and products backgrounds
T evaluate the inflation effects
Six-step Process
Identify purpose of financial analysis
Corporate overview
Financial analysis techniques
Detailed accounting analysis
Comprehensive analysis
Decision or recommendation
Tools & Techniques of Financial Analysis
BEP or C-V-P analysis
Capital budgeting technique
Cash flow analysis
Ratio analysis
Variance analysis
Leverage analysis
Risk analysis & control technique.
Earned value analysis.
Sensitivity analysis.
Simulation analysis.
Limitations of Analysis of F.S.: Define Financial Analysis
(i) Limitations of Financial Statements: Financial Statements are the basis f financial analysis. Hence, the limitations of financial statements, such as influence of accounting concepts and conventions, personal judger disclosure of only monetary events, etc., are also the limitations of analysis and financial statements.
(ii) Ignores the Price-Level, Changes: Financial analysis fails to disclose current worth of the enterprise, since it is based on .financial statements, which are merely a record of historical cost.
(iii) Not. Free from Bias: In many situations, the accountant has to make a choice out of various alternatives available, e.g., choice in the method of depreciation choice in the method of inventory valuation. Since, the subjectivity is interest in personal judgment, the financial statements are therefore not free from bias. As a result, financial analysis also cannot be said to be free from bias.
(iv) Window Dressing: The term window dressing means presentation of account that conceals vital facts and showing better position than what it actually is. On account of such a situation, financial analysis may not be a definite indicator of good or bad management. Define Financial Analysis
No comments:
Post a Comment