Financial Statement Analysis
The process of critical evaluation of the financial information contained in the financial statements in
order to understand and make decisions regarding the operations of the firm is called ‘Financial
Significance of Analysis of Financial Statements
Financial analysis is useful and significant to different users in the following ways: –
(a) Finance manager: Financial analysis focusses on the facts and relationships related to managerial
performance, corporate efficiency, financial strengths and weaknesses and creditworthiness of the
company. A finance manager must be well-equipped with the different tools of analysis to make
rational decisions for the firm. The tools for analysis help in studying accounting data so as to
determine the continuity of the operating policies, investment value of the business, credit ratings and
testing the efficiency of operations. The techniques are equally important in the area of financial
control, enabling the finance manager to make constant reviews of the actual financial operations of
the firm to analyse the causes of major deviations, which may help in corrective action wherever
(b) Top management: The importance of financial analysis is not limited to the finance manager
alone. It has a broad scope which includes top management in general and other functional managers.
Management of the firm would be interested in every aspect of the financial analysis. Company
Accounts and Analysis of Financial Statements their overall responsibility to see that the resources of
the firm are used most efficiently and that the firm’s financial condition is sound. Financial analysis
helps the management in measuring the success of the company’s operations, appraising the
individual’s performance and evaluating the system of internal control.
(c) Trade payables: Trade payables, through an analysis of financial statements, appraises not only
the ability of the company to meet its short-term obligations, but also judges the probability of its
continued ability to meet all its financial obligations in future. Trade payables are particularly
interested in the firm’s ability to meet their claims over a very short period of time. Their analysis will,
therefore, evaluate the firm’s liquidity position.
(d) Lenders: Suppliers of long-term debt are concerned with the firm’s longterm solvency and
survival. They analyse the firm’s profitability over a period of time, its ability to generate cash, to be
able to pay interest and repay the principal and the relationship between various sources of funds
(capital structure relationships). Long-term lenders analyse the historical financial statements to
assess its future solvency and profitability.
(e) Investors: Investors, who have invested their money in the firm’s shares, are interested about the
firm’s earnings. As such, they concentrate on the analysis of the firm’s present and future profitability.
They are also interested in the firm’s capital structure to ascertain its influences on firm’s earning and
risk. They also evaluate the efficiency of the management and determine whether a change is needed
or not. However, in some large companies, the shareholders’ interest is limited to decide whether to
buy, sell or hold the shares.
(f) Labour unions: Labour unions analyse the financial statements to assess whether it can presently
afford a wage increase and whether it can absorb a wage increase through increased productivity or
by raising the prices.
(g) Others: The economists, researchers, etc., analyse the financial statements to study the present
business and economic conditions. The government agencies need it for price regulations, taxation
and other similar purposes