Do Companies such as Chemalite B need to conduct a financial analysis?
Chemalite B Incorporation is an example of firms that rely on the former year's financial reports to project its performance in the next year. This is because most transactions that can determine the net profits or losses generated by an institution are within the financial statements. Cash flow statements typically constitute all the financial data and activities regarding the inflow and outflow of a company's finances. Therefore, auditors, financial managers, and officers can retrieve the investment, operational, receipts, and payment information from the cash flow statements. Comparative statements of an organization's cash flow comprise of clues to the solvency and earning potential. Cash flow statements also enable a person to identify the recurring income sources, expenses, and losses for an organization. Notably, the financial analysis of the cash flow statements can predict whether the income sources for an individual or organization can be relied upon even in the near future.
They also help investors understand the financial health and whether investing in it is the right decision. Notably, Cashflow statements are a useful tool when it comes to forecasting based on assets such as the plant, equipment, and property owned by an organization. As a result, it can be used by firms to plan for future financial needs and obligations. Some of the information obtained from conducting a financial analysis includes profit, liquidity, and activity, among other ratios. Profit ratios are used to determine resource usage efficiency because significant profitability stems from the efficient use of resources. The three primary sources of data used in financial analysis by firms such as Chemalite are the balance sheet, profit, loss statement, and the cash flow statement. The balance sheet outlines the assets and liabilities of a company. The profit and loss statement provides information regarding a business’s performance within a certain period, including the revenues, expenses, net profit, and loss.
The cash flow statement also records a company's performance while considering some non-accountable items such as devaluation. Liquidity ratios measure the ability of a firm to cater to its short-term financial obligations. Activity ratios analyze how a firm utilizes its resources. Companies including Chemalite B are required to conduct financial analysis because it:
Facilitates investment decision-making- Notably, the financial analysis gives knowledge based on the amount, time frame, returns, and payback on any financial investments.
Influences lending decisions- financial analysis provides an unbiased view regarding the financial position and health. As a result, creditors can identify the risks and profitability with regards to giving credit facilities.
Evaluate the viability of Decisions- Through financial analysis, CEOs, the board of directors, and other decision-makers can identify the shortcomings and weaknesses of the decisions implemented. As a result, they are able to analyze their corporate governance strategy or adopt newer methods.
Facilitate taxation- financial analysis enables organizations to examine the tax owed to the government.
Competitive advantage- the financial information provided by financial analysis case studies can be used to determine an organization's competitive advantage to another in the same industry.
Facilitates Growth- Notably, accurate and timely analysis of financial statements determines an individual firm's growth. The economic analysis enables the management team to identify the shortcomings of specific policies and investments. They also provide information regarding the most profitable innovations that are viable for a business.