Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the various items of the balance sheet and the profit and loss account.
Significance of Financial Analysis for different users:-
Finance manager:- Financial analysis focuses on the facts and relationships related to managerial performance, corporate efficiency, financial strengths and weakness and credit worthiness of the company.
Top Management:- The importance of financial analysis is not limited to the finance manager alone. Its scope of importance is quite broad and includes top management in general and the other functional managers. Management of the firm would be interested in every aspect of the financial analysis.
Trade creditors:- A trade creditor, through an analysis of the financial statement, appraises not only the urgent ability of the company to meet its obligations but also judges the probability of its continued ability to meet all its financial obligations in future.
Lenders:- Suppliers of long-term debt are concerned with the firm’s long-term solvency and survival. They analyse the firm’s probability over time, its ability to generate cash to pay interest and repay the principal and the relationship between various sources of funds.
Investors:- who have invested their money in the firm’s shares are interested in the firm’s earnings. As such, they concentrate on the analysis of the firm’s present and future profitability.
Labour unions:- Labour unions analyse the financial statements to assess whether they can presently afford a wage increase and whether they can absorb a wage increase through increased productivity or by raising the prices.
Others:- Economists, researchers, etc. analyse the financial statements to study the present business and economic conditions. Government agencies need it for price regulations, taxation and other similar purposes.