Meaning of Financial Analysis
An analysis consists of distinguishing and separating the parts of a whole to get to know its elements and principles. It is the examination that is made of a reality susceptible of intellectual study.
Through analysis, it is possible to study the limits, characteristics and possible solutions of a problem.
According to DigoPaul, financial, on the other hand, comes from finance, which is a concept linked to public finances, assets and flows. The notion of finance is used to name the study of the circulation of money between individuals, companies, or states.
The financial analysis, therefore, is a method to analyze the financial implications of business decisions. For this it is necessary to apply techniques that allow to collect the relevant information, carry out different measurements and draw conclusions.
In order to fully 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, comes from the Greek and is made up of three different parts: the prefix “ana”, which means “up”; the verb “lyein”, which is synonymous with “drop”; and the suffix “-sis”, which is equivalent to action.
On the other hand, financial is a word that comes from Latin as evidenced by the fact that it is formed by the verb “finis”, which gave rise to the French term “financer” which means to pay off a debt, and the suffix “–ero ”, Which comes to indicate the belonging of something.
Thanks to financial analysis, it is possible to estimate the return on an investment, study its risk and know if the cash flow of a company is enough to meet the payments, among other issues.
The financial analysis helps to understand the operation of the business and to maximize the profitability from the action on the existing resources. The managers can access information on the expected impact of strategic decisions.
In addition to everything exposed so far, it is important to know that all financial analysis has an identical structure. It is a union of several sections that are those that contain the necessary data to reach a certain conclusion. Specifically, it is made up of:
• Accounts. In this case, all the information regarding both the financial statements of the company in question, as well as its liquidity, risk or profitability are included.
• Heritage. Specifically, in this section, what is done is to carry out an analysis of the assets of the company: its composition, the different items of the asset and the weight they exercise in the total, the evolution it has had in recent years…
• Passives. It is about checking the ability of the company to repay the debts it contracts.
• Economic analysis, where it is determined whether the entity is really achieving sufficient profitability or not.
The investors also appeal to financial analysis to analyze the riskiness of their decisions and to set goals to fulfill. The lenders and creditors finally use financial analysis to determine what risk there is for copper of a credit or loan.