Introduction To Financial Analysis

1.1 INTRODUCTION TO FINANCIAL ANALYSIS
In order to assess the viability, stability and profitability of a business, financial analysis is deemed to be an important measure. It also helps the top management in taking crucial business decisions, which could either make or break the company. Further, financial analysis helps in assessing the past performance along with the current financial position, in order to make predictions about the future performance of the company. Since, financial analysis determines the liquidity, profitability and solvency of the firm, it enables companies to make recommendations about the purchase and sale of securities, such as stocks and bonds. Such recommendations, would be of more importance to investors who

Typically, financial analysis is used to analyze whether a firm is solvent, liquid or profitable enough or not to be invested in. Financial analysis is also known as financial statement analysis or accounting analysis or ratio analysis. Wherein, the main aim is to assess the viability, profitability and stability of a business, sub-business or a project. It involves extrapolating the company’s past performance into an estimate of the company’s future performance. The future plans of the firm should be laid down in view of the firm’s financial strengths and weaknesses. Thus, financial analysis is the starting point for making plans, before using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating the

The analysis undertaken in this study may not provide a complete and exhaustive analysis. This could be due to a number of reasons and/or factors.
• The calculation of ratios may not be accurate. As different firms use different approaches, as in they may work out the ratios on the basis of profit after interest and tax whereas some others may work out on profit before interest and tax. In this study, it was not clear as to whether the profit was before or after interest and tax
• Financial analysis ignores qualitative factors. Financial ratios are calculated on the basis of quantitative analysis only. But, sometimes qualitative factors overrides quantitative aspects. For instance, loans are given on the basis of accounting ratios but credit ultimately depends on the character and managerial ability of the borrower. Under such circumstances, the ratios could be