Question

In 200 words or more, What is the importance of financial statement analysis? Original work please

Answer 1

• The financial statements provide business health and financial health of an organization. It shows the performance of organization. Senior management and middle management uses this information for strategy and decision making. Balance sheet, income statements and cash flow statements show health of an organization and is widely used by existing stakeholders and any prospective investor to understand the company financial health and growth potential.
• Financial statements depict summarized view of organization performance over a period of time. These statements are used to declare dividends by calculating organization profitability, take loan from banks and present same to all investor to show future prospects and current performance.
• Ratio analysis is used by deducing various ratios from financial statements in order to identify weakness and strengths of organization. It gives easy understanding of various complex numbers to investors and stakeholders. For example, High inventory turnover ratio is good as it shows the organization is moving inventory at a rapid pace. Organization is able to convert inventory to cash at a very rapid rate. High inventory ratio can be bad if the organization is indulging into sharp price cuts to increase demands as this results in highly competitive industry and overall profitability of industry decreases.