Definition of financial analysis and objectives of financial analysis

Definition of financial analysis

Financial analysis (in English: Financial Analysis) is a process that aims to evaluate methods of investing and employing money in companies, and to study the efficiency and profits resulting from their operations, and it depends on the use of a group of methods, such as analyzing financial ratios; In order to realize the opportunities and problems of investment, financial analysis is defined as a study of the financial information of a specific facility or project. In order to understand cash flows, profits, and expenses. Another definition of financial analysis is the evaluation of projects and businesses related to finance. In order to determine the nature of its performance and suitability, financial analysis is often used to study the financial condition of the facility, in terms of it being stable and profitable. In order to justify its cash investments.

Objectives of financial analysis

Financial analysis, as an important means for all types of enterprises, seeks to achieve a set of goals, the most important of which are:

• Determine the facility’s financial position.
• Comparing the facility’s financial situation with that of institutions operating in the same sector.
• Participation in making decisions related to money; By achieving the highest returns and lowest costs.
• Use suggested financial policies; In order to change the financial condition of the facility.
• Contributing to directing individual investors to participate in investing in all investment fields.
• Follow up on the financial risks that the facility may face; Because of the policy used in financing.
• Knowing the facility’s success rate in achieving its goals and profits.

Financial analysis tools

The application of financial analysis depends on the analyst responsible for it using one of the analysis tools. Which helps to successfully achieve the desired goals, and the most important of these tools are:

• Financial structure analysis: It is to ensure that there is funding for needs without affecting the financial balance and financial return. By relying on the application of the principle of liquidity and maturity, or separating analysis activities.
• Evaluation of activity and results: It is concerned with the way enterprises achieve results, and judging the extent to which their activities are able to achieve profits. By using intermediate management balances, which are balances that show the stages that constitute causes and results; Which contributes to making the right decisions.
• Cost-effectiveness evaluation: It is the comparison between the results achieved and the methods used to achieve them. It is classified as the most objective indicators in the performance evaluation process and is used to make investment and financing decisions.
• Cash flow analysis: It is one of the most advanced analysis tools. It is used in balanced financial analysis, and is concerned with following up the causes of the financial surplus or deficit in the treasury. It also contains indicators used in the process of making strategic decisions.

Characteristics of financial analysis

Financial analysis has many characteristics, including:

• Financial analysis is an activity that seeks to transform financial data from financial statements into a set of information used in making decisions.
• Financial analysis includes all activities at various administrative levels.
• Financial analysis does not depend on limited data from a single financial statement, but rather includes all financial statements such as income and budget.

The importance of financial analysis

The use of financial analysis in enterprises is of great importance to the work environment in them, and this importance is summarized according to the following points:

• Helping management set goals; Which contributes to preparing appropriate plans for implementing economic activity.
• Support management in correcting errors as they occur; By providing her with appropriate corrective means.
• Discover new investment opportunities.
• This analysis is a tool that helps support the effectiveness of the audit.
• Contributing to diagnosing the facility’s financial situation.
• Knowing the facility’s ability to obtain loans and repay them.

Types of financial analysis

There are multiple types of financial analysis, and they are classified according to the following principles:

• The entity implementing the financial analysis, which includes two types:
  • Internal analysis: It is the financial analysis that is carried out through a department or employee affiliated with the organization’s organizational structure, such as the accounting department and the financial department.
  • External analysis: It is the financial analysis carried out by an entity outside the facility, which contributes to serving external parties and striving to achieve their own goals. Examples include chambers of commerce and industry and banks.
• The method used in financial analysis is divided into several types: Including analysis by comparisons, analysis by mathematical methods, and analysis based on index numbers.
• Financial analysis according to its relationship with time, and includes two types:
  • Vertical analysis: It is the analysis that is used to analyze the financial statements separately. Where each list is analyzed independently of the other lists, and this analysis is applied in a vertical manner to the list’s elements, each element is attributed to the total value of its elements, and then added to the total of a partial set; That is, the relationships between all elements are studied on a comprehensive basis, and within a specific date that is described as static or fixed, and this analysis is described as a relative distribution.
  • Horizontal analysis: It is the analysis that studies the behavior of each element of the financial statements over time. The movement of each element follows a decrease or increase over time, and this analysis is considered dynamic. Because of its ability to explain changes that occur over a long period of time.

Financial analysis results

After applying financial analysis to all financial statements of an institution; By using financial analysis tools, this leads to the emergence of a set of results, which are:

• The results of the internal analysis, These include:
  • Use of the information obtained in the field of public oversight.
  • Provide judgment about financial management during the period of carrying out the financial analysis.
  • Contributing to making the appropriate decision about distributing or investing financial profits.
  • Providing provisions about the nature of implementation of financial budgets.
• The results of the external analysis, These include:
  • Use identification of tax-related figures; In order to evaluate the financial results.
  • Submitting a proposal on financial policy; It aims to change the financial condition of the facility.
  • Evaluating the financial condition of the facility and its ability to bear the consequences of the loans.