Financial Statement Analysis

Financial Statement epitomeFinancial surgical procedure, as a part of fiscal management, is the main indicator of the supremacy or failure of the companies. Financial performance depth psychology put forward be considered as the heart of the pecuniary decisions. balancenal evaluation of the performance of the companies is essential to contrive sound financial policies and to attract potential investors. Sh beholders are interested in EPS, dividend, net worth and market value per share. Management is interested in both aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquid of the company. Government is interested from the regulatory point of view. Besides, other stakeholders such(prenominal) as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, every the stakeholders are interested i n the performance of the companies but their perspective may be different.Financial analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss measure (Pandey 1992, p109). It is a general term referring to the process of extracting and removeing information in financial masterys for use in management decision making, for example, financial analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures. Financial appraisal is a scientific evaluation of the profitability and strength of any business concerns (Jain 1996, p36). It seeks to cotton up the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company (Srivastava 1985, p59).The objective of financial analysis is a detailed cause and effect study of the profitability and financial position (Hingorani and Ramnthan 1992).According to Hampton, Financial Analysis is the process of determining the significant run and financial characteristics of a firm from bill selective information and financial rumor. The goal of such analysis is to determine the efficiency and performance of the firms management, as reflected in the financial records and reports(Hampton 1986, p85). Financial statements are such records and reports, which contain the info required for performance management. It is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.The financial statements of a business enterprise are intended to provide very much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government age ncies, and in some instance, competitors (Benjamin et al 1975, p412). Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of a accounts of the company- the Balance Sheet reflecting the assets, liabilities and superior as of a certain date and the Profit and Loss Account showing the results of operation during a period. The financial statements are a collection of data organized according to logical and consistent accounting procedures (Hampton 1986, p85). The function of financial statement is to convey an understanding of some financial aspects of the company.Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may be done by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements channelise an appraisal of a companys previous financial performance and its f uture potential (Shim and Siegel 1989, p197). The analysis of a financial statement is done to obtain a repair insight into a firms position and performance (Munakarmi 2000). Analyzing a financial statement is a process of evaluating the relationship between component parts of financial statement to obtain a better understanding of the firms position and performance (Metcalf and Titard 1976, p157). The financial analysis is thus the analysis of the financial statements, which is done to evaluate the performance of the company. Ratio Analysis, Trend Analysis, Comparative Financial Statement Analysis and Common Size Statement Analysis are the major tools of the financial analysis.Financial statement analysis involves the computation of ratios to evaluate a companys financial position and results of operation (Shim and Siegel 1989, p196). Ratio is an important tool of financial statement analysis. The relationship between two accounting figures, expressed mathematically is known as fi nancial ratio (Pandey 1992, p110). Ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to hire a quantitative judgement about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship in order to appraise financial performance (Munakarmi 2000). Ratio analysis is such a powerful tools of financial analysis that through it, the economic and financial position of a business whole can be fully x-rayed. Ratios are just a convenient way to summarize large quantities of financial data and to compare the performance of the firms (Brealey and Myeres 2003). Ratios are exceptionally useful tools with which one can judge the financial performance of the firm over a period of time (Srivastava 1985, p63). Performance ratio can provide an insight into a banks profitability, return on investment, capital adequacy and liquidity (Clark 1999, p257).The above theories s uggest that financial analysis helps to measure the performance of the companies. contrasting analysts desire different types of ratios, depending largely on whom the analysts are and why the firm is being evaluated. Short-term creditors are concerned with the firms ability to pay its bills promptly. In the unforesightful run, the amount of liquid assets determines the ability to pay off current liabilities. They are interested in liquidity. Long-terms creditors hold bonds or debentures mortgages against the firm are interested in current payment of interest and the eventual repayment of the principal. The company must be sufficiently liquid in the short-term and have adequate lettuce for the long-term. They examine liquidity and the profitability. Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firms stock. Without liquidity, the firm could not pay the cash dividends. Without profits, the firm could not be able to declare dividen ds. With poor policies, the common stock would trade at a lower price in the market (Hampton 1986, p124).Analysis of the financial statement of a company for one year or for a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably guarantee a longer period. The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of transfigure (Pandey 1992, p51). This method involves the calculation of percentage relationship that each item bears to the same item in the base year. Trend percentage discloses the changes in the financial and operating data between specific periods and makes it possible to form an opinion as to whether favourable and unfavourable tendencies are reflected by the data. Comparative Statement Analysis is another(prenominal) method of measuring the performance of the company. It is used to compare the performance and position of the firm wit h the average performance of the industry or with other firms, such a comparison will identify areas of weakness which can then be addressed to rectify the situation.From the above discussion, it is clear that performance is the result of various financials variables. Analysis of performance is not limited to analyzing one or two variable(s). it could be analyzed with the help of various financial indicators. Most of the studies, however, devoted to measure the performance in terms of profitability, stock returns, and turnover, risk adjusted returns on investment, dividends, growth of sales, market capitalization. Analyzing stock return constitutes market price per share and dividend per share. The trend of such variables over the period and comparison of the results with the results of the same variables of another firm or another industry indicates the relative performance of the firm or industry.