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Financial analysis is the analysis of the accounts and the economic prospects of a firm.

1 Goals

Such an analysis has for objective to assess the firm's:

• performance, for the management to improve it,

• solvency, so as for a bank or a supplier to grant a credit,

• potential value to decide an investment or divestment. Then it is called fundamental analysis and is linked to business valuation or stock valuation

2 Methods

Financial analysts, among other tasks, use to compare financial ratios (of solvency, profitability, growth...)

• between several periods (the last 5 years for example)
• and between similar firms.

Those ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example :

Net profit / equity = return on equity. Gross profit / balance sheet total = return on assets

3 See also