Importance of financial and profit analysis

Importance of financial and profit analysis

financial and profit analysis is a tool through which a business strength and weakness can be determined through establishing a relationship between items listed on financial statement as well as profit and loss accounts.This financial analysis is one of the greatest and appropriate mechanism under which business viability in the stated industry can be derived.

The main purposes among the many reasons of performing financial analysis includes:

=Establishment of a firm’s liquidity ratio.

=Establishment of a firms solvency.Upon doubt, suppliers should not risk their resources in such a business but should bar as the firm’s profitability is at compromising note and chances of repaying principal and interest is not guaranteed.

=Establishment of a firm’s earning.This is ideal to investors as they are much interested to determining whether a business earning will diminish or flourish in future.estimating the future growth or decline in a company’s earnings.The rationale is that, after examining the company’s historical and present performance, no shareholder would want to eventually suffer a loss.

=leadership prowess.

=tax observance.

=Analysis of financial statements can be used to identify and recalculate PAT in order to determine its viability.This serves as a countermeasure to reduce tax evasion.

=Finally, for all of the shortlisted companies in the stock exchange market, the method is perfect for determining the industry’s levels of competition.

A company must assess how it stands in relation to other businesses operating in the same industry to determine if it is leading or following.

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