Financial Analysis of Your Credit Options • 11.14.09
The financial analysis uses the information from the income statement, the balance sheet and the cash flow statement to compute various financial ratios. The purpose of the financial statement analysis is to evaluate the firm’s financial decision-making process and operating performance.
Nevertheless, we have to recognize that the information value of individual data items from the financial statements is quite limited. Financial ratios have to be examined in the context of the firm’s history, the industry, major competitors and the state of the economic cycle.
Furthermore, it has to be pointed out that the assessment of the financial situation of a company should not be static, but a dynamic analysis has to support the investment process. Financial numbers of a company have to be forecasted by the implementation of scenario analysis (e.g. worst case – base case – best case). By this means it can be shown whether a company will succeed in future and sales-, investment- and financing-plans will help to assess the dynamic liquidity position of a company.
