4.2 Objectives of Financial Statement Analysis
Definition
Financial statement analysis is the process of analysing a company's financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value.
return on capital and capital preservation as well as all aspects and stages of operations, profitability, liquidity, capital structure and valuation
in the short-term look at the present financial condition and liquidity of the firm, the type of their current assets and rate of their turnover and in the long-term look at the firm’s capital structure
decision making and control and helps management to identify actions that will maximise shareholder wealth and ensure that the firm receives an optimal allocation of capital resources
job security and wage & salary negotiations and are interested in the long-term profitability of the firm since this has a bearing on future job security
evaluate company’s profitability and financial position so that they can continue to sell to the company and ensure that any trade credit provided is secure
valuation of potential candidates and try to determine potential synergistic benefits and stress is placed on the valuation of assets, including tangible assets such as goodwill, patents and any liabilities transferred
analytical review and expresses an opinion on the fair presentation of financial statements
income fairly stated
Case Studies
Watch this video for a more detailed explanation as to who the users of financial statements are and what they usually look at it for.