The ratio-based financial analysis of a company uses the financial data provided in company's reports (balance sheet and profit and loss statement). It allows to synthetically assess the key elements of company's standing, becoming an efficient financial decision making tool. It can be performed for the following areas of company's financial standing assessment:
- financial liquidity,
- debt management,
- efficiency (effectiveness of assets management),
- profitability (of sales, assets, equity),
- general performance of assets and capitals.
From the time perspective, the analysis of financial reports can be divided into:
- retrospective analysis – related to the state and financial results of the company, achieved in the past,
- prospective analysis – allowing to plan and predict future financial standing of the company based on the current and previous data.
The financial analysis provides the management of the company with crucial information, helping to make decisions about further ways of operation and also allowing to verify how the plans are being realized. Furthermore, the financial analysis of the company allows to identify the weak points, which require immediate improvements (being a part of early warning system against the threat of bankruptcy). Therefore, it not only make the forecasting simpler, but also allows to prepare a development strategy, which includes the key factor being the risk.
The financial analysis supports also the decision making process related to external parties. It allows to compare different companies, aiding the selection of partners and contractors. It is also useful to monitor the financial standing of trade credit debtors. Thus, it can be applied to widely understood business cooperation.
It is important to note that each assessment (its scope and content) depends on the aim and planned use of its results, defined at the beginning by the subject performing the analysis. Taking this into oconsideration one may focus on specific aspects of company's financial sanding assessment, such as profitability or liquidity. For instance: for the shareholders (owners) the most important elements will be raleted to the profitability and efficiency of the company, while for banks and other institutions providing financing (lenders) debt management ratios and liquidity ratios will be more important. To conclude, the financial analysis should be used having in mind the aim of such an assessment.