Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability, and profitability of a business, sub-business or project. (Source: Wikipedia)
In layman language, to check the genuineness of business or to know true net-worth of the entity or say to know repayment capability of any person or entity. Financial Analysis deals for Present + Future.
Users of Financial Analysis:
Users of Financial Analysis not only include Shareholders and Lenders but includes all stakeholders like Supplier or Creditor, Customers, Government etc.
1. Existing or Prospective Investor
Based financial analysis one can estimate or predict probable growth of the business which is useful for taking the decision whether it is advisable or not to continue hold shares of the company for existing investors, and for Prospective Investor whether to invest fund or not at this moment.
As per my understanding, Management is the biggest user of Financial Analysis. Based on Past and Present information, various crucial decisions are taken for future. Like, Long-term business plans of capacity expansion, Cost reduction decisions, whether to discontinue any product line & Segment or not etc.
Lenders like banks and financial institutions are interested to understand credit profile of borrower i.e. know future prospectus and repayment capacity of the borrower.
4. Suppliers or Customers
Suppliers are interested to know credit profile, operational efficiency, and payment ability. Customers are interested mainly in Operational efficiency and business continuity etc. This may happen when Customer has significant dependency on the entity for its operations.
It is very obvious that Competitors are interested to know business strategies, Cost structure, various product innovations, SWOT analysis etc. of rival and so, performance evaluation can be done in relation to rivals.
6. Specific Users
Like Government may be interested in knowing financial profile changes for a particular period for a specific sector or Industry, so that information can be used to take regulatory changes or tax structure changes etc.
Rating Agencies, who are responsible for assigning credit rating to borrower based on analysis of financial information
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