Financial analysis
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Financial analysis is the analysis of the accounts and the economic prospects of a firm.
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Goals
Such an analysis has for objective to assess the firm's:
- performance, for the management to improve it,
- solvency, so as for a bank or a supplier to grant a credit,
- potential value to decide an investment or divestment. Then it is called fundamental analysis and is linked to business valuation and stock valuation
Methods
Financial analysts, among other tasks, use to compare financial ratios (of solvency, profitability, growth...)
- between several periods (the last 5 years for example)
- and between similar firms.
Those ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example :
Net profit / equity = return on equity
Gross profit / balance sheet total = return on assets
Stock price / earnings per share = P/E-ratio