Financial analysis definition and objectives of financial analysis

Financial analysis definition and objectives of financial analysis

Financial Analysis is a process aimed at evaluating methods of investing and investing money in companies, and studying the efficiency and profits resulting from their operations, and depends on the use of a range of means, such as the analysis of financial ratios; With the aim of realizing the opportunities and problems related to investment, financial analysis is defined as a study of the financial information of a particular facility or project; In order to understand cash flows, profits, and expenses.

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Another definition of financial analysis is the evaluation of projects and businesses associated with finance; In order to determine the nature of its performance and suitability, financial analysis is often used to study the financial condition of the facility, in terms of being stable and profitable; in order to justify their cash investments.

Financial Analysis Objectives

Financial analysis, as one of the important means for all types of establishments, seeks to achieve a set of goals, the most important of which are:

  • Determine the financial position of the facility.
  • Comparing the financial position of the facility with that of institutions operating in the same sector.
  • participate in making decisions about money; By achieving the highest returns and the lowest costs.
  • the use of proposed fiscal policies; In order to change the financial condition of the facility.
  • Contribute to directing individual investors to participate in investing in all investment fields. Follow up on the financial risks that may face the facility; Because of the policy used in the financing.
  • Knowing the success rate of the facility in achieving its goals and profits.

Financial analysis definition and objectives of financial analysis

Financial analysis tools

The application of financial analysis depends on the use by the analyst responsible of one of the analysis tools; Which helps to reach the desired goals successfully, the most important of these tools:

  • Analyzing the financial structure: It is to ensure the existence of financing for needs without impacts on the financial balance and financial profitability; By relying on the application of the principle of liquidity and maturity, or the separation between the activities of the analysis.
  • Activity and Results Evaluation: It is concerned with the way establishments achieve results, and judge the extent to which their activities can achieve profits. by the use of intermediate management balances, which are balances that show the stages that constitute causes and effects; Which contributes to making the right decisions.
  • Cost-effectiveness evaluation: It is the comparison between the achieved results and the methods used to achieve them, and they are classified as the most objective indicators in the performance evaluation process, and are used to make investment and financing decisions.
  • Cash flow analysis: It is one of the most advanced analysis tools; It is used in balanced financial analysis, and is concerned with following up the causes of the financial surplus or deficit in the treasury, and it also contains indicators used in the strategic decision-making process.

Features of financial analysis

Financial analysis has many characteristics, including:

  • It is an activity that seeks to transform the financial statements of the financial statements into a set of information used in making decisions.
  • Includes all activities at various levels of management.
  • Financial analysis does not depend on limited data from one financial statement, but rather includes all financial statements such as income and budget.

The importance of financial analysis

The use of financial analysis in establishments is of great importance to the work environment in them, and this importance is summarized according to the following points:

  • assisting management in setting goals; This contributes to preparing appropriate plans for the implementation of economic activity.
  • Support management in correcting errors as they occur; By providing them with appropriate corrective means.
  • Discover new investment opportunities.
  • This analysis is a tool that helps support the effectiveness of the audit.
  • Contribute to diagnosing the financial situation of the establishment.
  • Knowing the extent of the facility’s ability to obtain loans and repay their value.

Types of financial analysis

There are many types of financial analysis, and they are classified according to the following bases:

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  • The entity implementing the financial analysis, which includes two types:
    • Internal analysis: It is the financial analysis that is carried out by a department or employee that follows the organizational structure of the institution, such as the accounting department and the financial department.
    • External analysis: It is the financial analysis that is carried out by a party outside the facility, and contributes to serving the external parties, and striving to achieve their own goals, examples of which are the chambers of commerce and industry and banks.
  • The method used in financial analysis, and is divided into several types; Including analysis by comparisons, analysis by mathematical methods, and analysis based on index numbers.
  • Financial analysis according to its relationship with time, and includes two types:
    • Vertical analysis: is the analysis that is used to analyze the financial statements separately; Where each list is analyzed independently of the other lists, and this analysis is applied in a vertical way to the list elements, each element is attributed to the total value of its elements, and then added to the total partial group; That is, it studies the relationships between all the elements on a macro basis, and within a specific date that is described as static or fixed, and this analysis is described as a relative distribution.
    • Horizontal analysis: is the analysis that studies the behavior of each of the elements of the financial statements during the passage of time; Where the movement of each element follows a decrease or increase with the passage of time, and this analysis is dynamic; Because of its ability to explain changes that occur over a long period of time.

Financial Analysis Results

After applying the financial analysis to all the financial statements of an organization; By using financial analysis tools, this leads to the emergence of a set of results, namely:

  • The results of the internal analysis, including the following:
    • Use of information obtained in the field of public oversight.
    • Provide a judgment about financial management during the period of implementation of the financial analysis.
    • Contribute to making the appropriate decision about the distribution or investment of financial profits.
    • Providing judgments about the nature of the implementation of financial budgets.
  • The results of the external analysis, including the following:
    • Use of identifying tax-related numbers; In order to evaluate the financial results.
    • submitting a proposal for a fiscal policy; It aims to change the financial condition of the enterprise.
    • Assessing the financial condition of the facility, and its ability to bear the consequences of the loans.

Financial analysis definition and objectives of financial analysis

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