The need for and importance of Financial Analysis and Control for Company Valuation

1. 1
Ahsanullah University of Science and Technology
Assignment on “The need for and importance of Financial
Analysis and Control for Company Valuation ”
Submitted to:-
x
Assistant Professor
Schoolof Business
Ahsanullah University of Science and Technology
Submitted by:-
Name: Fahim Shahriyar

2. 2
Letter of Transmittal
To,
x
Assistant Professor,
Schoolof Business
Ahsanullah University of Science and Technology
Sub: Letter of Transmittal
Dear sir,
It is indeed a great pleasure for me to be able to hand over the assignment on
“The need for and importance of Financial Analysis and Control for Company
Valuation”. This assignment is the result of the knowledge which has been
acquired from the respective course.
I tried my level best for preparing this report. The information of this report is
mainly based on Internet information. Some other details were gathered from
the text book. I gave my hundred percent for making this report come together.
I, Hope you will appreciate my work and excuse the minor errors. Thanking you
for your cooperation.
Sincerely,
Fahim Shahriyar

3. 3
Table of Contents
Contents Page no
Introduction of Financial analysis and control 4
Types of Financial Analysis 4-5
How Financial Analysis is used 5-7
Purpose of Financial Analysis and Control 7-9
Elements of a Company Assessed by the financial
analysis
9-10
Financial Statement Analysis-Users 10
Financial Statement used in financial analysis 11-13
Future Performance 13
Benefits 13-15
Importance of Financial analysis and control 15-17
Business valuation 17-19
Financial Analysis for a Company 19-22
Conclusion 23

4. 4
“The need for and importance of Financial Analysis and
Control for company or Business valuation”
Introduction
Financial Analysis and Control: Financial analysis is the process of
examining a company’s performance in the context of its industry and economic
environment in order to arrive at a decision or recommendation. Often, the
decisions and recommendations addressed by financial analysts pertain to
providing capital to companies—specifically, whether to invest in the
company’s debt or equity securities and at what price. An investor in debt
securities is concerned about the company’s ability to pay interest and to repay
the principal lent. An investor in equity securities is an owner with a residual
interest in the company and is concerned about the company’s ability to pay
dividends and the likelihood that its share price will increase.
Financial controls are the procedures, policies, and means by which an
organization. Monitors and controls the direction, allocation, and usage of
its financial resources. Financial controls are at the very core of
resource management and operational efficiency in any organization.
Types of Financial Analysis:
There are two types of financial analysis: fundamental analysis and technical
analysis.
Fundamental Analysis: Fundamental analysis uses ratios gathered from
data within the financial statements, such as a company's earnings per share
(EPS), in order to determine the business's value. Using ratio analysis in
addition to a thorough review of economic and financial situations surrounding
the company, the analyst is able to arrive at an intrinsic value for the security.
The end goal is to arrive at a number that an investor can compare with a
security's current price in order to see whether the security is undervalued or
overvalued.

5. 5
Technical Analysis: Technical analysis uses statistical trends gathered from
trading activity, such as moving averages (MA). Essentially, technical analysis
assumes that a security’s price already reflects all publicly-available information
and instead focuses on the statistical analysis of price movements. Technical
analysis attempts to understand the market sentiment behind price trends by
looking for patterns and trends rather than analyzing a security’s fundamental
attributes.
How Financial Analysis is used: The financial analysis basically
indicates the usage of financial data to assess the performance of a company and
recommend as to how things can be improved in the future. The primary role of
a financial analyst is to work in an excel sheet used for analyzing historical data
and accordingly make projections based on their perception of how the
company will perform in the near future.Different Uses of Financial Analysis
are as follows
The various uses of financial analysis are as follows:
 Analysis of financial statements – Whenever a firm is interested in
investing in a small business, the financial analysts then examines its past
and present financial statements. The idea here is to determine the probable
weaknesses and problem areas if any,to be discussed with the other
company owners.
 Ratio analysis – This helps in comparing values within the company
against other companies and the industry every year. It includes the liquidity
ratio, debtratio, etc. Business owners and management teams might use
ratio analysis in their day-to-day planning to measure where they stand in
the industry. If the ratio analysis shows that the company has more debt
than other businesses in the same industry, the owner might be encouraged
to pay off or reduce some loans.
 To analyse future performance – Financial analysts assist small
businesses in their future planning. This planning involves the evaluation of
the company’s income statement, balance sheet and cash flow statement.
This helps in interpreting the trends and identifying the strengths and
weaknesses. By following the trends of the general economy the analyst can
estimate how well the company will be able to fare in the coming years.
Accordingly, they can plan the equipment to be purchased and take other
initiatives.

6. 6
 Making investment decisions – Expert financial analysts are able to make
investment decisions and recommend ideas based on sound reasoning.
Every company should have dedicated financial analysts who would keep a
watch over the strengths and weaknesses of the company and advise the
management accordingly. In some cases, they can also hire the services of
financial consultants on a periodic basis.
Corporate Financial Analysis: In corporate finance, the analysis is
conducted internally by the accounting department and shared with management
in order to improve business decision making. This type of internal analysis
may include ratios such as net present value (NPV) and internal rate of return
(IRR) to find projects worth executing.
Many companies extend credit to their customers. As a result, the cash receipt
from sales may be delayed for a period of time. For companies with large
receivable balances, it is useful to track days sales outstanding (DSO), which
helps the company identify the length of time it takes to turn a credit sale into
cash. The average collection period is an important aspect in a company's
overall cashconversion cycle.
A key area of corporate financial analysis involves extrapolating a company's
past performance, such as net earnings or profit margin, into an estimate of the
company's future performance. This type of historical trend analysis is
beneficial to identify seasonal trends.
For example, retailers may see a drastic upswing in sales in the few months
leading up to Christmas. This allows the business to forecast budgets and make
decisions, such as necessary minimum inventory levels, based on past trends.
Investment Financial Analysis: In investment finance, an analyst external
to the company conducts an analysis for investment purposes. Analysts can
either conduct a top-down or bottom-up investment approach. A top-down
approach first looks for macroeconomic opportunities, such as high-performing
sectors, and then drills down to find the best companies within that sector. From
this point, they further analyze the stocks of specific companies to choose
potentially successful ones as investments by looking last at a particular
company's fundamentals.

7. 7
A bottom-up approach, on the other hand, looks at a specific company and
conducts similar ratio analysis to the ones used in corporate financial analysis,
looking at past performance and expected future performance as investment
indicators. Bottom-up investing forces investors to consider microeconomic
factors first and foremost. These factors include a company's overall financial
health, analysis of financial statements, the products and services offered,
supply and demand, and other individual indicators of corporate performance
over time.
Purpose of Financial Analysis and Control:
Individual investors or firms that are interested in investing in small businesses
use financial analysis techniques in evaluating target companies' financial
information. By examining past and current financial statements -- balance
sheets, income statements and cash flow statements -- potential investors can
form opinions about investment value and expectations of future performance.
Financial analysis can also assist small-business owners as they weigh the effect
of certain decisions, suchas borrowing, on their own companies.
Financial Statements Analysis:
If a firm is interested in investing in a small business, its financial analysts will
likely examine the company's past and current financial statements. The
objective would be to discover possible weaknesses and any problem areas
that should be discussed with company owners. The analysts would look for
unusual movements in items from year to year and for patterns in revenue and
profits. Steady growth is normally positive, and severe ups and downs might
be a sign of discord. Cash flow statements should indicate how the business
normally obtains and uses cash. The management team of a small business
might conduct a similar analysis as a part of an annual review of the business.
The company's financial adviser or accountant might participate in such
reviews.

8. 8
There are two key methods for analyzing financial statements:
1. Horizontal and vertical analysis:
 Horizontal analysis: the comparison of financial information over a
series of reporting periods, Horizontal analysis looks at amounts on the
financial statements over the past years. This allows you to see how
each item has changed in relationship to the changes in other items.
Horizontal analysis is
 Vertical analysis: the proportional analysis of a financial statement,
where each line item on a financial statement is listed as a percentage of
another item.
Typically, this means that every line item on an income statement is stated as a
percentage of gross sales, while every line item on a balance sheet is stated as
a percentage of total assets.
Thus, horizontal analysis is the review of the results of multiple time periods,
while vertical analysis is the review of the proportion of accounts to each other
within a single period.
2. Ratio Analysis
The second method for analyzing financial statements is the use of many kinds
of ratios. Ratio analysis compares values within the company from year to
year and against other companies and the industry. Liquidity ratios such as the
current ratio (current assets divided by current liabilities) show the company's
ability to pay its short-term obligations on time. The debt ratio (total assets
divided by total liabilities) shows how much of the company's assets are
provided by debt. A lower percentage shows a lower dependence on debt. The
higher the percentage, the more risk the company has taken on. Business
owners and small-business management teams might use ratio analysis in their
regular planning, to measure their companies against others in their industry. If
ratio analysis shows that a company has a great deal more debt than other
businesses in its industry, the owner might be prompted to pay off or reduce
some loans. You use ratios to calculate the relative size of one number in
relation to 7 another. After you calculate a ratio, you can then compare it to the
same ratio calculated for a prior period, or that is based on an industry

9. 9
average, to see if the company is performing in accordance with expectations.
In a typical financial Statement analysis, most ratios will be within
expectations, while a small number will flag potential problems that will
attract the attention of the reviewer. The methods to be selected for the
analysis depend upon the circumstances and the users' need. The user or the
analyst should use appropriate methods to derive required information to fulfill
their needs
 Liquidity ratios: These measure a company’s ability to continue doing
business. Examples of liquidity ratios include the cash coverage ratio,
current ratio, quick ratio and liquidity index.
 Activity ratios: These measure management’s quality and performance.
Examples of activity ratios include the accounts payable turnover ratio,
accounts receivable turnover ratio, fixed asset turnover ratio, inventory
turnover ratio, sales-to-working capital ratio and working capital
turnover ratio.
 Leverage ratios: These measure a company’s reliance on debt to
finance operations. Examples of leverage ratios include the debt service
coverage ratio, debt-to-equity ratio and fixed charge coverage.
 Profitability ratios: These measure a company’s ability to generate
profit. Examples of profitability ratios include the contribution margin
ratio, gross profit ratio, net profit ratio, break-even point, margin of
safety, return on equity, return on net assets and return on operating
assets.
Elements of a Company Assessed by the financial
analysis:
Generally financial analysts assess the following elements:
1. Profitability – It is the ability to earn income and sustain growth in both the
short- and long-term. A company's degree of profitability is usually based on
the income statement, which reports on the company's results of operations.
2. Solvency – It is the ability to pay its obligation to creditors and other third
parties in the long-term. It is also based on the company's balance sheet, which
indicates the financial condition of a business at a given point of time.
3. Liquidity – It is the ability to maintain positive cash flow, while satisfying
immediate obligations and it is also based on the company's balance sheet,
which indicates the financial condition of a business at a given point of time.

10. 10
4. Stability - The firm's ability to remain in business in the long run, without
having to sustain significant losses in the conductof its business.
Assessing a company's stability requires the use of the income statement and
the balance sheet, as well as other financial and non-financial indicators.
Financial Statement Analysis-Users:
 Creditors: Anyone who has lent funds to a company is interested in its
ability to pay back the debt, and so will focus on various cash flow
measures.
 Investors: Both current and prospective investors examine financial
statements to learn about a company's ability to continue issuing
dividends, or to generate cash flow, or to continue growing at its
historical rate.
 Management: The company controller prepares an ongoing analysis of
the company's financial results, particularly in relation to a number of
operational metrics that are not seen by outside entities
 Regulatory authorities: If a company is publicly held, its financial
statements are examined by the Securities and Exchange Commission
to see if its statements conform to the various accounting standards and
therules of the SEC.

11. 11
Financial Statement used in financial analysis:
Financial Statements are divided into three parts named
1. Income Statement/Profit & loss account
2. Balance Sheet and
3. Notes to Financial Statements
1. Income Statement:
The Profit & Loss Account reveals financial result in term of Net Profit or Net
loss for the period of account year which is normally 12 months.
Items appearing on Debit side of the Profit & Loss Account: The
Expenses incurred in a business is divided in two parts. i.e; one is Direct
expenses are recorded in trading Account and another one is indirect expenses,
which are recorded on the debit side of profit & loss account.
Indirect Expenses are grouped under four heads:
Selling Expenses: All expenses relating to sales such as carriage outwards,
travelling expenses, advertising etc.
Office Expenses: Expenses incurred on running an office such as Office
Salaries, Rent, Tax, Postage, Stationery etc.,
Maintenance Expenses: Maintenance expenses of assets. It includes Repairs
and Renewals, Depreciation etc.
Financial Expenses: Interest Paid on loan, Discount allowed etc., are few
examples for Financial Expenses.
Item appearing on Credit side of Profit and Loss account:
Gross Profit is appeared on the credit side of P & L. account. Also other gains
and incomes of the business are shown on the credit side. Typical of such gains
are items such as Interest received, Rent received, Discounts earned,
Commission earned

12. 12
2. Balance Sheet
The accounting balance sheet is one of the major financial statements used by
accountants and business owners. (The other major financial statements are the
income statement, statement of cash flows, and statement of stockholders'
equity). The balance sheet is also referred to as the statement of financial
position.
The balance sheet presents a company's financial position at the end of a
specified date. Some describe the balance sheet as a "snapshot" of the
company's financial position at a point (a moment or an instant) in time. For
example, the amounts reported on a balance sheet dated December 31, 2012
reflect that instant when all the transactions through December 31 have been
recorded.
Because the balance sheet informs the reader of a company's financial position
as of one moment in time, it allows someone like a creditor to see what a
company owns as well as what it owes to other parties as of the date indicated
in the heading. This is valuable information to the banker who wants to
determine whether or not a company qualifies for additional credit or loans.
Others who
would be interested in the balance sheet include current investors, potential
investors, company management, suppliers, some customers, competitors,
government agencies, and labor unions.
We will begin our explanation of the accounting balance sheet with its major
components, elements, or major categories:
 Assets
 Liabilities
 Owner's (Stockholders') Equity

13. 13
3. Notes to Financial Statements
The notes (or footnotes) to the balance sheet and to the other financial
statements are considered to be part of the financial statements. The
notes inform the readers about such things as significant accounting
policies, commitments made by the company, and potential liabilities
and potential losses. The notes contain information that is critical to
properly understanding and analyzing a company's financial statements.
Future Performance
Financial analysis can assist small businesses in their planning. Evaluation of a
company's balance sheet, income statement and cash flow statement --
interpreting trends and identifying strengths and weaknesses -- might yield
enough information to enable management to make projections of revenues
and profits for three to five years. With knowledge of trends in the general
economy and in the company's industry, they can form a reasonable estimate
of how well the company might fare in the coming years. Such analyses can be
helpful to businesses that need to plan equipment purchases and other
initiatives.
Benefits
By employing expert financial analysis on an ongoing basis, firms are able to
make investment decisions or recommendations based on sound reasoning.
Companies might employ their own financial analysts who would keep watch
over the company's strengths and weaknesses and advise upper management
accordingly. Alternatively, some companies might decide to engage the
services of financial consultants who could conduct periodic financial
analyses.

14. 14
There are some effective why of financial analysis for business valuation:
1. Identify the industry economic characteristics:
First, determine a value chain analysis for the industry—the chain of activities
involved in the creation, manufacture and distribution of the firm’s products
and/or services. Techniques such as Porter’s Five Forces or analysis of
economic attributes are typically used in this step.
2. Identify company strategies:
Next, look at the nature of the product/service being offered by the firm,
including the uniqueness of product, level of profit margins, creation of brand
loyalty and control of costs. Additionally, factors such as supply chain
integration, geographic diversification and industry diversification should be
considered.
3. Assess the quality of the firm’s financial statements:
Review the key financial statements within the context of the relevant
accounting standards. In examining balance sheet accounts, issues such as
recognition, valuation and classification are keys to proper evaluation. The
main question should be whether this balance sheet is a complete
representation of the firm’s economic position. When evaluating the income
statement, the main point is to properly assess the quality of earnings as a
complete representation of the firm’s economic performance. Evaluation of the
statement of cash flows helps in understanding the impact of the firm’s
liquidity position from its operations, investments and financial activities over
the period—in essence, where funds came from, where they went, and how the
overall liquidity of the firm was affected.
4. Analyze current profitability and risk:
This is the step where financial professionals can really add value in the
evaluation of the firm and its financial statements. The most common analysis
tools are key financial statement ratios relating to liquidity, asset management,
profitability, debt management/coverage and risk/market valuation. With
respect to profitability, there are two broad questions to be asked: how
profitable are the operations of the firm relative to its assets—independent of

15. 15
how the firm finances those assets—and how profitable is the firm from the
perspective of the equity shareholders. It is also important to learn how to
disaggregate return measures into primary impact factors. Lastly, it is critical
to analyze any financial statement ratios in a comparative manner, looking at
the current ratios in relation to those from earlier periods or relative to other
firms or industry averages.
5. Prepare forecastedfinancial statements:
Although often challenging, financial professionals must make reasonable
assumptions about the future of the firm (and its industry) and determine how
these assumptions will impact both the cash flows and the funding. This often
takes the form of pro-forma financial statements, based on techniques such as
the percent of sales approach.
6. Value the firm:
While there are many valuation approaches, the most common is a type of
discounted cash flow methodology. These cash flows could be in the form of
projected dividends, or more detailed techniques such as free cash flows to
either the equity holders or on enterprise basis. Other approaches may include
using relative valuation or accounting-based measures such as economic value
added.
Importance of Financial analysis and control:
Financial analysis is an important aspect in maintaining a successful business.
Analysis, when done properly allows a company to better pinpoint problem
aspects of the business. The company can then take corrective action to alleviate
or mitigate the problem aspects of the business. Aspects such as return on assets,
return on equity, net income, and the quick ratio are all aspects needed to help the
business function properly. Depending on the nature of the business, each metric
will vary in its importance. For example, a highly capital intensive business
relying on large amounts of fixed assets, may want to know the return they are
getting from those assets. Likewise, a startup firm would be very interesting in its
ability to pay off current debts in a timely and orderly fashion. As such the quick
ration will take priority. In regards to running and maintaining a business
however, I believe the three most important financial analysis tools are return on
assets, profit margins, and current assets. Financial computations from the

16. 16
finance office will allow investors to ascertain the actual position of the business.
One of the most widely financial computations used is that of ROA. It is a strong
profitability ratio because of its relation to both the profit margin and asset
turnover. ROA helps show how well the company controls its costs and how
efficient they are in utilizing their resources.
Financial analysts provide guidance to businesses and individuals making
investment decisions. Financial analysts assess the performance of stocks,
bonds, commodities, and other types of investments. Also called securities
analysts and investment analysts, they work for banks, insurance companies,
mutual and pension funds, securities firms, the business media, and other
businesses, making investment decisions or recommendations. Financial
analysts study company financial statements and analyze commodity prices,
sales, costs, expenses, and tax rates to determine a company's value by
projecting its future earnings. They often meet with company officials to gain a
better insight into the firms' prospects and management.
The financial statement analysis is important for different reasons, they are as
follows:
 Holding of Share Shareholders are the owners of the company. They
may have to take decisions whether they have to continue with the
holdings of the company's share or sell them out. The financial statement
analysis is important as it provides meaningful information to the
shareholders in taking suchdecisions.
 Decisions and Plans The management of the company is responsible for
taking decisions and formulating plans and policies for the future. They,
therefore, always need to evaluate its performance and effectiveness of
their action to realize the company's goal in the past. For that purpose,
financial statement analysis is important to the company's management.
 Extension of Credit The creditors are the providers of loan capital to the
company. Therefore they may have to take decisions as to whether they
have to extend their loans to the company and demand for higher interest
rates. The financial statement analysis provides important information to
them for their purpose.

17. 17
 Investment Decision The prospective investors are those who have
surplus capital to invest in some profitable opportunities. Therefore, they
often have to decide whether to invest their capital in the company's
share. The financial statement analysis is important to them because they
can obtain useful information for their investment decision making
purpose.
Business valuation:
Valuation refers to the process of determining the present value of a company or
an asset. It can be done using a number of techniques. Analysts that want to
place value on a company normally look at the management of the business, the
prospective future earnings, the market value of the company’s assets, and its
capital structure composition.
Valuation may also be used in determining a security’s fair value, which
depends on the amount that a buyer is ready to pay a seller, with the assumption
that both parties will enter the transaction.
During the trade of a security on an exchange, sellers and buyers will dictate the
market value of a bond or stock. However, intrinsic value is a concept that
refers to a security’s perceived value on the basis of future earnings or other
attributes of the entity that are not related to a security’s market value.
Therefore, the work of analysts when doing valuation is to know if an asset or a
company is undervalued or overvalued by the market.
Valuations can be performed on assets or on liabilities such as company bonds.
They are required for a number of reasons including merger and acquisition
transactions, capital budgeting, investment analysis, litigation, and financial
reporting.
Reasonsfor Performing a Business Valuation:
Business valuation to a company is an important exercise since it can help in
improving the company. Here are some of the reasons to perform a business
valuation.
1. Litigation: During a court case such as an injury case, divorce, or where
there is an issue with the value of the business, you may need to provide
proof of your company’s worth so that in case of any damages, they are

18. 18
based on the actual worth of your businesses and not inflated figures
estimated by a lawyer.
2. Exit strategy planning: In instances where there is a plan to sell a
business, it is wise to come up with a base value for the company and
then come up with a strategy to enhance the company’s profitability so as
to increase its value as an exit strategy. Your business exit strategy needs
to start early enough before the exit, addressing both involuntary and
voluntary transfers. A valuation with annual updates will keep the
business ready for unexpected and expected sale. It will also ensure that
you have correct information on the company fair market value and
prevent capital loss due to lack of clarity or inaccuracies.
3. Buying a business: Even though sellers and buyers usually have diverse
opinions on the worth of the business, the real business value is what the
buyers are willing to pay. A good business valuation will look at market
conditions, potential income, and other similar concerns to ensure that the
investment you are making is viable. It may be prudent to hire a business
broker who can help you with the process.
4. Selling a business: When you want to sell your business or company to a
third party, you need to make certain that you get what it is worth. The
asking price should be attractive to prospective purchasers, but you
should not leave money on the table.
5. Strategic planning: The true value of assets may not be shown with a
depreciation schedule, and if there has been no adjustment of the balance
sheet for various possible changes, it may be risky. Having a current
valuation of the business will give you good information that will help
you make better business decisions.
6. Funding: An objective valuation is usually needed when you need to
negotiate with banks or any other potential investors for funding.
Professional documentation of your company’s worth is usually required
since it enhances your credibility to the lenders.

19. 19
7. Selling a share in a business: For business owners, proper business
valuation enables you to know the worth of your shares and be ready
when you want to sell them. Just like during the sale of the business, you
ought to ensure no money is left on the table and that you get good value
from your share.
Financial Analysis for a Company:
It’s important to perform a company financial analysis in order to see how the
company is performing compared to earlier periods of time and how the
company’s performance stands up against other competitors in its industry.
“Financial Analysis is something of an art,” said Philadelphia University
assistant professor of management, Harvey B. Lermack. While performing a
company financial analysis can be involved, these steps will provide a basic
foundation for you to get started.
Experienced managers, investors, and analysts collect industry information over
time that allows them to perform financial analysis of companies more
thoroughly and more swiftly. But, for our purposes we will discuss the basic
steps for you to start dabbling in the art of financial analysis.
Step 1. Collect the company’s financial statements from the last three to five
years including:
 Balance Sheets
 Cash Flow Statements
 Income Statements
 Shareholders equity statements

20. 20
Balance sheet
Cash flow statements

21. 21
Income statement
Shareholders equity statements

22. 22
Step 2. Analyze these financial statements and scan them in order to look for
large movements in specific items from one year to the next
Step 3. Make sure to review the financial statement’s notes. These notes may
have information that could be important in your analysis of the business.
Step 4. Analyze the Balance Sheet to see if there are large changes in the
company’s assets, liabilities, or equity.
Step 5. Examine the Income Statement to identify trends over time.
Step 6. Next, evaluate the business’s Shareholder’s Equity Statement. Lermack
recommends asking, “Has the company issued new shares, or bought some
back? Has the retained earnings account been growing or shrinking?”
Step 7. Analyze the company’s Cash Flow Statement.
Step 8. Calculate financial ratios. Learn the top five financial ratios and how to
calculate them.
Step 9. Then, gather the company’s key competitor’s data.
Step 10. Review the market data of the business’s stockprice, as well as the
Price to Earnings (P/E) Ratio.
Step 11. Review the Dividend Payout. The Dividend Payout Ratio measures
the percentage of a company’s net income given to shareholders in the form of
dividends. How to calculate the Dividend Payout Ratio: Total Annual
Dividends Per Share / Diluted Earnings Per Share
Step 12. Now, you can evaluate all of the data YOU generated. Congratulations,
you did it! You successfully performed a financial analysis on a business!

23. 23
Conclusion:
Analysis and interpretation of financial statements is an important tool in
assessing company’s performance. It reveals the strengths and weaknesses of a
firm. It helps the clients to decide in which firm the risk is less or in which one
they should invest so that maximum benefit can be earned. It is known that
investing in any company involves a lot of risk. So before putting up money in
any company one must have thorough knowledge about its past records and
performances. Based on the data available the trend of the company can be
predicted in near future. This project of financial analysis & interpretation in the
production concern is not merely a work of the project but a brief knowledge
and experience of that how to analyze the financial performance of the firm.
Financial analysis determines a company’s health and stability, providing an
understanding of how the company conducts its business. But it is important to
know that financial statement analysis has its limitations as well. Different
accounting methods adopted by different firms’ changes the visible health and
profit levels for either better or worse. Different analysts may get different
results from the same information. Hence, we must conclude that financial
statement analysis is only one of the tools (although a major one) while taking
an investment decision.