What are Goals and Objectives of financial analysis?

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The main objectives of financial analysis include:

• Solvency

One of the most important goals of financial analysis is to assess the ability of a business to pay back its debts (Short term and Long term) to its creditors. The liquidity of a business entity is reflected in its balance sheet.

• Profitability

Another goal of financial analysis aims at assessing the profitability of a firm. Here, profitability refers to a firm’s ability to earn income and sustain its growth in both long-term and short-term. Statement of comprehensive income is used to determine the profitability of a company. Income statement provides other information as well like details of sources of income and expenses.

• Liquidity

In addition to the aforesaid goals and objectives, a financial analysis reports about the firm’s ability to sustain positive cash flow in addition to satisfying current debts. Just like the solvency of a firm, the liquidity of a business firm is also indicted by its balance sheet.

• Stability

Stability implies the ability of a business firm to maintain its existence in the long run. However, this stability should not include significant losses during the conduct of this business. The process of assessing the stability of a firm through financial analysis involves the use of the balance sheet as well as the income statement. Besides, other non-financial and financial indicators also play a vital role in the process.

It is noteworthy that while preparing the financial analysis for a company, the analysts focus on the balance sheet, the cash flow statement, and the income statement. Besides, one important area involved in financial analysis is the extrapolating firm’s past performance into its future performance.