Financial Statement Analysis and its utilization in selecting shares

Posted by writer on August 24th, 2009 at 12:25am

Analysis of financial statements of businesses bestows you an awareness on how the corporation is supervising its establishment. With the help of financial statement analysis, the management will be able to figure out what steps they can take to increase shareholder wealth, whether it is investing in new projects or restructuring debt to equity ratio of the companyto increase shareholder value. As such, compononets such as capital structure an capital budgeting will be comprised in the financial analysis of the corporation. With financial statement analysis, stockholders can know how the business is performing against other companies within the industry, and the viability of the business in the future.

Viability of a project can be found out through a financial analysis which can be performed by financial analysts employed by the company. In addition to that, analysts employed by the corporation can give the management of the firm recommendations on what project to choose to maximize returns when there are multiple projects to choose from. Financial analysts will provide possible returns an investment in a particular project will result in. Whether it is good to issue new stocks or bonds or if its best to just borrow money through loans, financial analysts will provide recommendations to the management that would best maximize company’s returns. As such, in these roles, financial analysts will be performing capital budgeting and capital structuring roles.

Financial institutions will use financial statement analysis to see how good financial fundamentals and the future viability of a firm are, and from their findings will decide whether it is a good match to their investment goals. Large investment corporations have their own in house financial analysts who advice to their employers on what stocks might be a good buy, these recommendations are usually private and only available within the business. Because of this role, accurate financial statement analysis of a firm is quite critical as the findings of the financial analysis will influence the buy or sell decisions of owners, which in turn will affect the value of a business’s stock. A financial analyst might suggest his clients to sell the stock of a company after accounting financial analysis, if he believes that the viability of the business is compromised. If he were to give such a suggestion, the price of that business’s share would depress significantly.

Tags: analysis, capital budgeting, capital structure, credit agencies, financial analysis, financial statements analysis, fundamental analysis, investment analysis, investments

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