We are now in the second part of the Corporate Financial Accounting course. The second part focuses on Financial Statement Analysis. I recall sometime ago, the faculty told us that there are two parts to the course- understanding financial statements and analyzing the statements.
I learned that it is a process that you undergo to assess a company’s worth and performance. The purpose of this is to identify areas of strengths and weaknesses.
I learned that there are several reasons why an investor or other users of financial statements may want to analyze financial statements. These are:
To determine the liquidity position of the company
To ascertain the extent of debt and equity financing.
How profitable the company is
How efficient the company is the use of their resources.
As an MBA student, I see the importance of financial statement analysis. Before now, I had no idea what the statement contains. I could not even tell if a company was doing well financially or not. This segment of the course has been an eye opener. With this knowledge I can know what to focus on when next I receive a financial statement from my banks and investment platforms.
So how do we analyze the statements? We would need some tools and techniques to do so. Let me write on one of the tools the faculty taught us in class:
Financial ratio analysis: we can use this tool to analyze a company’s statement when we want to determine its liquidity, solvency, efficiency and profitability. We can use this tool to check the company’s strengths and weakness. Financial ratio helps to examine the link between two sets of data.
What are the benefits of financial ratio analysis?
This tool can help users of the report to make effective decisions about a company.
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