Financial Performance Analysis

Topics: Financial ratio, P/E ratio, Financial statements Pages: 5 (1727 words) Published: March 21, 2012
Financial statement analysis is the process of examining relationships among financial statement elements and making comparisons with relevant information. It is a tool in decision-making processes related to stocks, bonds, and other financial instruments. Analysis of financial statements provides valuable information for managerial decision. Financial analysis is commonly called analysis and interpretation offinancial statement. Analysis of financial statements means establishing relationship between the items in financial statements for determining the financial strength and weakness of business. It is the process of scanning of the financial statements to judge profitability solvency, stability, growth of prosperity of a firm. According to Myer “Financial statement analysis is largely a study of relationship among various financial factors in a business as disclosed by a single set of statements and study of these factors shown in a series of statements”. Thus financial analysis is the use of financial statements to analyzea company’s financial position and performance, and to assess future financial performance. In short financial analysis is the process of examining the composition of financial statements for getting valuable information about the business. It is a technique of x-raying the financial position as well as progress of a firm. Financial analysis includes analysis and interpretation of financial statements. The word analysis literally means ‘to break into parts’. In the context of financial statement, analysis is the process of breaking down a complex set of figure into simple statements in order to have a better understanding. It is a critical examination of financial transactions effected during a definite period. The term interpretation ‘literally’ means to explain the meaning and significance of data. In the context of financial analysis, interpretation means to explain the financial position and earning capacity of the business that may be understood even by an ordinary person. In short, interpretation means explaining the financial statements on the basis of analysis. Ratios are a valuable analytical tool when used as part of a thorough financial analysis. They can show the standing of a particular company, within a particular industry. However, ratios alone can sometimes be misleading. Ratios are just one piece of the financial jigsaw puzzle that makes up a complete analysis. (Leslie Rogers, 1997). Chidambaram Rameshkumar, Dr. N. Anbumani on February 2, 2006 in his article “An overview on financial statements and ratio analysis” argue that Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow you to solve your business problems before your business is destroyed by them. Financial ratios are widely used to develop insights into the financial performance of companies by both the evaluators and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Evaluators use financial ratios, for instance, to forecast the future success of companies, while the researchers' main interest has been to develop models exploiting these ratios. Many distinct areas of research involving financial ratios can be differentiated. ( Barne, 1986). Peeler J. Patsula, on January 23, 2006in his article “successful business...
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