Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.
- If conducted internally, financial analysis can help managers make future business decisions or review historical trends for past successes.
- If conducted externally, financial analysis can help investors choose the best possible investment opportunities.
- There are two main types of financial analysis: fundamental analysis and technical analysis.
- Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security.
- Technical analysis assumes a security’s value is already determined by its price, and it focuses instead on trends in value over time.
It is wise to conduct periodic review and analysis of your company’s financial performance. Additionally, financial analysis can provide valuable insight into your company’s financial health which can help you make sound decisions for the future.