Financial analysis process is of great importance and a vital and effective role in the field of economics and investment. In this article, we will discuss the definition of financial analysis and the characteristics of financial analysis.
Definition of financial analysis
Financial analysis is a process aimed at evaluating ways of investing and employing money in companies, examining the efficiency and profitability of their operations, and relying on the use of a range of tools, such as financial ratios analysis, to identify opportunities and problems of investment.
Financial analysis is defined as a financial study of a particular enterprise or project, in order to understand cash flows, profits and expenses. Another definition of financial analysis is the evaluation of projects and businesses associated with financing to determine the nature and adequacy of their performance. Financial analysis is usually used to examine the financial situation of the entity in terms of its stability and profitability in order to justify its cash investments.
Objectives of Financial analysis
Financial analysis as an important tool for all types of enterprises seeks to achieve a set of objectives.
– Working to determine the financial position of the establishment.
– To compare the financial situation of the establishment with the institutions operating in the same sector.
– Participate in the decision-making regarding money; by achieving the highest returns and the lowest costs.
– Use of proposed financial policies; to change the financial position of the entity.
– Contributing to directing individuals from investors to participate in investment in all areas of investment.
– Follow-up of financial risks that the establishment may face due to the policy used in financing.
– Know the success rate of the establishment in achieving its goals and profits.
Types of financial analysis
There are several types of financial analysis, which are classified according to the following principles:
– The financial analysis agency, which includes two types: Internal Analysis: It is the financial analysis carried out by a department or employee following the organizational structure of the organization, such as the accounting department, and financial management.
External analysis: The financial analysis carried out by an entity outside the establishment, contributes to the service of external entities, and seeks to achieve their objectives, such as chambers of commerce, industry and banks.
– The method used in financial analysis, divided into several types; including analysis of comparisons, analysis by mathematical methods, and analysis based on indices.
– Financial analysis according to its relationship with time, contains two types:
Vertical analysis: An analysis used to analyze financial statements separately. Each list is analyzed independently of the other lists. This analysis is applied vertically to the list elements. Each element is attributed to the total value of its elements, and then added to the total subset; The relationship between all elements is studied on a holistic basis and within a specific date that is described as static or static. This analysis is described as a relative distribution.
Horizontal analysis: An analysis that examines the behavior of each element of the financial statements over time. The movement of each element is reduced or increased over time. This analysis is dynamic because of its ability to explain changes occurring over a long period of time.
Financial analysis is characterized by several important characteristics, including:
– Financial analysis is an activity that seeks to convert the financial statements of financial statements into a set of information used in decision making.
– Financial analysis includes all activities at various administrative levels.
Financial analysis does not rely on limited data from a single financial statement, but includes all financial statements such as income and budget