Financial Statement Analysis: Investment Analysis

3 Financial Statement Analysis This refers to the process of analyzing the financial statements of a company for the purpose of decision-making. The external stakeholders can use the information to understand the overall health of an organization and evaluate the business value and financial performance. The financial statements of a company record important financial data on all business activities, hence making it possible to evaluate the company based on the current, past, and projected performances. The rationale for financial statement analysis entails the need to reassure confidence among the investors and be used to evaluate the performance of a company using various metrics such as liquidity and profitability (Linares-Mustarós, Coenders & Vives-Mestres, 2018).

The Financial Statements under Consideration The major financial statements here include the balance sheet, the income statement, and the cash flow statements. The balance sheet provides information on what the company is worth from a book value perspective. It gives a more comprehensive picture of the company's liabilities, assets, and the shareholder's equity on a given date. It paints a picture of a company's long-term assets and how efficiently a company can manage its receivables in the short term. The income statement provides details on the revenue earned by a company and the expenses involved in its operating activities. It shows the direct, indirect, and capital expenses that are incurred by a company. The income statement helps the analysts to look at the operating efficiency. Finally, the cash flow statement provides a view of a company's overall liquidity by showing cash transaction activities. It takes into consideration the cash inflows and outflows over the course of an accounting period, with the summation of the total cash available. Ideally, cash flow statements are supposed to be broken into three parts: operating, financing, and investing