MEANING OF FINANCIAL STATEMENT ANALYSIS

Analysis of financial statement is a systematic process of critical examination of the

financial information contained in the financial statements in order to understand and
make decision regarding the operation of the firm.

The analysis of financial is a study of

relationship among various financial facts and figure as set out in financial statement, ie,
balance sheet and profit and loss account .the complex data given in these financial
statements is dividend /broken into simple and valuable elements and relationships are
established between the elements of the same statements or different financial
statements. This process of division, establishing relationship and interpretation thereof to
understand the working and financial position of a business is known as Analysis of
financial statement.

DEFINITI0N OF FINANCIAL STATEMENT ANALYSIS

“Financial statement analysis is largely a study of relationships among the various

financial factors in a business, as disclosed by a single set of statement, and a study of
trends of these factors, as shown in a series of statements.”
_ MYER

“The analysis and interpretation of financial statements are an attempt to determine the
significance and meaning of financial statements data so that the forecast may be made
of prospects for future earnings, ability to pay interest and debt maturities (both current
and long term )and profitability and sound dividend policy “
_ Kennedy and Muller
Analyzing financial statements involves evaluating three characteristics of a company: its
liquidity, its profitability, and its insolvency. A short-term creditor, such as a bank, is
primarily interested in the ability of the borrower to pay obligations when they come due.
The liquidity of the borrower is extremely important in evaluating the safety of a loan. A
long-term creditor, such as a bondholder, however, looks to profitability and solvency
measures that indicate the company’s ability to survive over a long period of time. Long-
term creditors consider such measures as the amount of debt in the company’s capital
structure and its ability to meet interest payments. Similarly, stockholders are interested
in the profitability and solvency of the company. They want to assess the likelihood of
dividends and the growth potential of the stock.