3.21 : Analysing Financial Statements of a Company

Financial statement analysis involves assessing a company's financial well-being by examining core reports like the income statement, balance sheet, and cash flow statement. These analyses offer valuable insights into the company's profitability, operational effectiveness, and financial stability.

Comparative income statements reveal revenue and net income trends, showing whether the company effectively manages costs and maintains profit margins. For example, a company may experience revenue growth but see a decline in net income due to increasing costs, highlighting the need for operational adjustments.

The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. One key metric derived from the balance sheet is the current ratio, which measures a company's ability to meet its short-term obligations. A strong current ratio suggests short-term financial stability.

The cash flow statement tracks cash inflows and outflows, offering insights into cash management. Cash generated from core business operations, rather than loans, may signal a healthy business capable of sustaining its activities.

When used together, these financial statements allow stakeholders to assess the company's performance and make informed decisions about its future prospects.