Financial analysis means
assessing the viability, stability and profitability of a business, or a
project. It also includes techniques used for determining the needs of a
Techniques used for Financial Analysis
- Ratio Analysis: Can be defined as a quantitative
investment technique used for comparing a company's performance to
the market in general. Change in different ratios helps to study the
financial condition and performance of the company. These ratios can
be derived from items in the financial statements or from other
non-financial data & information.
- ROI or Return on Investment: Can be defined as the ratio
of money earned or lost on an investment in relation to the amount
invested. The money invested can be an asset, capital, etc. Also
known as rate of return or rate of profit, it is expressed as a
percentage of return on current or past investment.
- Break Even Analysis: Can be defined as analyzing the
break even point, where the total revenue equals total costs for a
particular product. It helps to determine the profitability of a
particular product / service. The analysis also indicates the time
period when the total cost incurred for manufacturing a product will
be equal to the revenue earned. It is a point after which a firm
will start earning profits.
- Profitability Analysis: Can be defined as profit making
capacity of a business. It is the measure of depicting how
profitable a business is. The analysis helps a company to know how
much profit it can earn in a given period of time.
The analysis is done by professionals who prepare financial reports of a
company, using the above techniques. The information for complete
financial analysis of a company is taken from its balance sheet, and
profit & loss statement.
There are a number of advantages that a company gets from financial
analysis. They are:
- Helps in taking informed business decisions
- Helps to change the strategies and functioning of a business
- Helps to monitor and forecast performance of the company
- Helps to measure profitability and assess competitiveness
- Helps to analyze restructuring opportunities