Financial analysis provides relevant information to maximize profitability.
Financial analysis is a method that allows you to analyze the financial consequences of business decisions . For this, it is necessary to apply techniques that allow collecting relevant information, carrying out different measurements and drawing conclusions.
It should be noted that an analysis consists of distinguishing and separating the parts of a whole to get to know its elements and principles . It is the examination carried out of a reality susceptible to intellectual study . Through analysis, it is possible to study the limits, characteristics and possible solutions of a problem.
Financial , on the other hand, comes from finance , which is a concept linked to public finances, assets and funds. The notion of finance is used to name the study of the circulation of money between individuals , companies or States .
The etymology of the concept of financial analysis
In order to perfectly understand the meaning of the term financial analysis, we have to resort to establishing its etymological origin . In this sense, we discover that its first word, analysis , emanates from Greek and is made up of three different parts: the prefix ana , which means “above” ; the verb lyein , which is synonymous with “let go” ; and the suffix -sis , which is equivalent to “action” .
On the other hand, financial is a word that comes from Latin, as demonstrated by the fact that it is formed by the verb finis , which gave rise to the French term financer , which refers to paying off a debt, and the suffix -ero , which comes to indicate ownership of something.
With financial analysis you can calculate the return on an investment.
Its usefulness
Thanks to financial analysis, it is possible to estimate the return on an investment , study its risk and know if a company's cash flow is enough to cover payments, among other issues.
Financial analysis helps to understand the functioning of the business and maximize profitability based on action on existing resources. Managers can access information about the expected effect of strategic decisions.
Structure of a financial analysis
In addition to everything discussed so far, it is important to know that every financial analysis has an identical structure. It is a union of several sections that contain the necessary data to reach an accurate conclusion. Specifically, it is made up of:
- Accounts . In this case, all information related to both the financial statements of the company in question, its liquidity , risk or profitability is included.
- Heritage . Specifically, in this section what we proceed to do is to carry out an analysis of the company's assets: its composition, the different items of assets and the weight that they exert in the total, the evolution it has had in recent years...
- Passives . It is about checking the company's ability to repay the debts it incurs.
- Economic analysis , where it is determined whether the entity is really achieving sufficient profitability or not.
Investors also use financial analysis to analyze the degree of risk of their decisions and to set the objectives to be met. Lenders and creditors , finally, use financial analysis to determine what risk exists for the collection of a credit or loan.